Pricing Strategies

You’ll be able to

Compare major pricing strategies and their goals
Calculate price using cost-plus (markup) pricing
Analyze the difference between markup and margin

Choosing a pricing strategy

Price must cover costs, reflect customer demand, and fit the brand’s positioning. Common strategies include cost-plus (markup) pricing, which adds a set percentage to unit cost; value-based pricing, which sets price by the value customers perceive; penetration pricing, a low introductory price to win market share quickly; price skimming, a high launch price aimed at customers willing to pay a premium early; and competitive pricing, matching or undercutting rivals. Each serves a different goal.

Cost-plus (markup) pricing

Cost-plus pricing is the most common method: start with the cost to make or buy a unit, then add a markup — a percentage of that cost — to set the selling price. It is simple and guarantees each sale covers cost plus a set margin, but it ignores what customers are actually willing to pay and how competitors are priced. It works best when costs are well known and demand is stable.

Markup versus margin

Two terms are easily confused. Markup is the added amount as a percentage of cost. Profit margin is the profit as a percentage of the selling price. The same dollar profit yields a higher markup percentage than margin percentage, because cost is a smaller base than price. A product bought for $40 and sold for $50 has a $10 profit: a 25% markup (10 ÷ 40) but a 20% margin (10 ÷ 50). Knowing which base a question uses prevents costly errors.

Cost-plus (markup) price

Selling Price = Unit Cost × (1 + Markup %)

Markup is expressed as a decimal of cost. A 40% markup on a $50 cost gives 50 × 1.40 = $70. Markup is based on cost; margin is based on selling price.

Worked example

A retailer buys a jacket for $50 per unit and applies a 40% markup. What is the selling price, and what is the profit margin as a percentage of that selling price?

1.Apply the cost-plus formula: Selling Price = Unit Cost × (1 + Markup %) = $50 × (1 + 0.40).
2.Compute the price: $50 × 1.40 = $70.
3.Find the profit in dollars: $70 selling price − $50 cost = $20 profit.
4.Compute the profit margin (profit ÷ selling price): $20 ÷ $70 ≈ 0.286, or about 28.6%.

Answer: The selling price is $70. The profit is $20 per jacket, which is a 40% markup on cost but only about a 28.6% profit margin on the selling price — a reminder that markup and margin are not the same.

Checkpoint

A product costs $80 to produce, and the company applies a 25% markup. What is the selling price?

Watch out

Never treat markup and margin as interchangeable. Markup is profit ÷ cost; margin is profit ÷ selling price. Because the bases differ, a 40% markup is always a smaller margin percentage — mixing them up is a classic mistake.

Checkpoint

A company launches an innovative gadget at a very high price to earn maximum revenue from early adopters before lowering it over time. This strategy is called:

On the exam

For pricing math, plug directly into Selling Price = Unit Cost × (1 + Markup %). If the question then asks for margin, remember to divide profit by the selling price, not the cost — the exam often tests exactly this distinction.

Answer the 2 checkpoints as you read.