Variable Cost-Plus Pricing
Candlefocus EditorThis pricing method is particularly useful in contract bidding scenarios, where fixed costs tend to be consistent. Companies that can produce more product with minimal changes to the fixed costs may also employ this method in order to maximize their profit margins. By adding a markup to the variable costs, the company can earn the same profit from each unit, regardless of the cost or size of the product.
With variable cost-plus pricing, however, the market forces such as customer demand and perceptions of value are not taken into consideration. This means that the company could be missing out on potential extra income that could come in from increasing prices to correspond with rising demand, or by decreasing prices to remain competitive.
Furthermore, this pricing strategy may cause pricing inefficiencies if the company’s variable costs are relatively low, as the markup may be unnecessarily high. This could lead to reduced customer satisfaction, as customers may question the price they are being charged, and ultimately, choose not to purchase the item.
In conclusion, variable cost-plus pricing can prove very beneficial to companies who want to be able to add a charge to cover both the fixed and variable costs in order to obtain a profit margin. It is ideal for contracts and businesses that cannot control the cost of production. However, it should not be over-employed as market forces are not taken into account and excessive markups may cause pricer inefficiencies.