What Is Cost Plus Pricing? Definition, Formula, and Examples

In this guide, we’ll break down what cost plus pricing is, how to calculate it, and when it’s best to use (or avoid). We’ll also look at some examples from Aussie small businesses to make it all click.

When you’re running a small business in Australia—whether it’s a café in Melbourne, a hair salon in Brisbane, or a plumbing service in Sydney—setting the right price for your products or services can feel like walking a tightrope. You don’t want to charge too little and lose profit, but go too high and customers might run to your competitors.

That’s where cost plus pricing comes in. It’s one of the simplest and most straightforward pricing methods out there. And if you understand how to use it properly, it can give you a clear, confident way to price your offerings—without needing a finance degree.

What Is Cost Plus Pricing?

Cost plus pricing (sometimes called markup pricing) is a method where you set your selling price by adding a fixed percentage (your “markup”) to the total cost of producing or providing your product or service.

In simple terms:

Selling Price = Cost + Markup

It’s like saying, “I spent $10 to make this, and I want a 30% profit, so I’ll sell it for $13.”

It’s that straightforward.

This strategy ensures that every sale covers your costs and brings in a bit of profit—helping keep your business sustainable. It’s especially popular among small businesses because it’s easy to apply and doesn’t require complex market research or software.

Why It’s Popular Among Small Aussie Businesses

Many small business owners in Australia—like café owners, tradies, bakers, and florists—love cost plus pricing because:

• It’s simple to calculate.
• You can guarantee a profit margin on every sale.
• It’s transparent—you know exactly how much you’re making.
• It’s easy to adjust when your costs change.

For instance, if you run a coffee shop in Melbourne and the cost of milk or coffee beans goes up, you can easily update your prices by reapplying your markup percentage.

The Cost Plus Pricing Formula

The basic formula looks like this:

Selling Price = Cost Price + (Cost Price × Markup Percentage)

Let’s break that down:

• Cost Price – This is how much it costs you to make or buy the product or service (including materials, labour, and overheads).
• Markup Percentage – The percentage of profit you want to earn on top of the cost.

Example:

Let’s say you own a small bakery in Adelaide.

You make a batch of cupcakes that cost you $2.50 per cupcake (including ingredients, labour, packaging, and electricity).

You want a 40% markup to make sure you’re earning enough to cover expenses and profit.

So:
Selling Price = $2.50 + ($2.50 × 0.40)
Selling Price = $2.50 + $1.00
Selling Price = $3.50 per cupcake

There you have it—a nice round price that covers your costs and profit.

Understanding What’s Included in “Cost”

Before you apply any markup, it’s crucial to know what’s included in your total cost. It’s not just the purchase price or materials—it also includes all the other expenses that go into making your product or service.

Here’s what you should consider including:

• Direct materials – Raw ingredients, parts, packaging, etc.
• Direct labour – Wages for people directly involved in production or service delivery.
• Overheads – Rent, electricity, water, insurance, maintenance, and equipment.
• Operational costs – Marketing, admin, cleaning, uniforms, software subscriptions.

Basically, any cost required to run your business and deliver that product or service should be included in the base cost.

How to Calculate Cost Plus Pricing (Step-by-Step)

Let’s walk through it clearly so you can do it for your own business.

Step 1: Calculate Your Total Cost per Unit

Add up all the expenses that go into producing or providing one unit of your product or service.

For example, a plumber might calculate:

So, your cost per plumbing job is $235.

Step 2: Decide on Your Markup Percentage

Your markup should cover your desired profit margin while keeping you competitive.

Markup rates can vary a lot depending on your industry:

• Cafés and restaurants: 30–60%
• Retail: 25–75%
• Trades and services: 10–40%
• Manufacturing: 15–50%

Let’s say our plumber chooses a 25% markup.

Step 3: Apply the Formula

Selling Price = $235 + ($235 × 0.25)
Selling Price = $235 + $58.75
Selling Price = $293.75

You can round that up to $295 per job.

Simple, clear, and profitable.

Pros of Cost Plus Pricing

Cost plus pricing has plenty of upsides for small business owners, especially if you’re just getting started or don’t have the time or resources for advanced pricing models.

1. Simple and Easy to Use

You don’t need a finance background or complex software—just a calculator (or your POS system).

2. Ensures Cost Recovery

You’ll never accidentally sell something below cost—every sale includes profit.

3. Predictable Profit

You can easily forecast your margins and revenue.

4. Adjusts with Costs

If your costs go up (like inflation, wage rises, or supplier price changes), you can quickly recalculate your price.

5. Fair and Transparent

It feels fair to both you and your customers—you’re not overcharging based on demand, just covering your costs and making a reasonable profit.

Cons of Cost Plus Pricing

While it’s simple, cost plus pricing does have a few downsides to watch out for.

1. Ignores Market Demand

It doesn’t consider what customers are willing to pay. You might price too high or too low compared to the market.

2. Can Lead to Overpricing

If your costs are high due to inefficiency, your final price might be uncompetitive.

3. Doesn’t Reward Efficiency

If you find cheaper suppliers or improve efficiency, your price may drop—but your profit percentage stays the same.

4. Competition Matters

If your competitors use market-based pricing, you might lose customers who compare prices.

So, while it’s simple, it’s not always the best fit for every situation—especially in highly competitive markets.

Cost Plus Pricing vs. Value-Based Pricing

It’s worth comparing cost plus pricing with another common strategy—value-based pricing.

So if you’re selling something standard (like coffee, baked goods, cleaning services), cost plus pricing works well. But if you’re offering something premium or niche, a value-based approach might bring in more profit.

Australian Examples of Cost Plus Pricing

Let’s look at how a few Aussie small businesses might apply cost plus pricing in real life.

1. Café in Melbourne

You run a café in Fitzroy and make fresh sandwiches daily.

Each sandwich costs:

• Ingredients: $4.20
• Labour: $1.80
• Overheads: $0.50
  Total Cost: $6.50

You add a 50% markup.
Selling Price = $6.50 + ($6.50 × 0.50) = $9.75

That fits perfectly for a quality sandwich in Melbourne’s café scene.

2. Florist in Sydney

A florist creating a small bouquet might calculate:

• Flowers and materials: $25
• Labour and wrapping: $10
• Overheads: $5
   Total Cost: $40

With a 40% markup:
Selling Price = $40 + ($40 × 0.40) = $56

It’s a simple way to stay profitable while keeping prices competitive.

3. Tradie in Brisbane

An electrician’s callout job costs:

• Labour: $100
• Materials: $35
• Travel and overheads: $20
  Total Cost: $155

With a 30% markup:
Selling Price = $155 + ($155 × 0.30) = $201.50

Round it to $200 for a clean figure.

When to Use Cost Plus Pricing

Cost plus pricing works best when:

• You have clear and predictable costs.
• You’re in a low-competition market.
• Customers value consistency and fairness.
• You sell custom or service-based products where costs vary.

Industries like manufacturing, construction, retail, food service, and trades often rely on cost plus pricing for this reason—it’s straightforward and adaptable.

When Not to Use It

You might want to avoid cost plus pricing when:

• Market prices fluctuate quickly (like tech or fashion).
• Competitors are aggressively price-cutting.
• You’re targeting a luxury or niche segment where value matters more than cost.

In those cases, a value-based or competitive pricing model might suit you better.

Tips for Making Cost Plus Pricing Work for You

If you’re planning to use cost plus pricing in your small business, here are a few handy tips to make sure it actually drives profit, not just covers costs.

1. Know All Your Costs

Don’t forget small expenses like packaging, cleaning, or payment fees. Those add up quickly.

2. Keep an Eye on Market Rates

Even if you’re using cost plus, check what competitors are charging. You don’t want to price yourself out of the market.

3. Review Regularly

Costs change—especially with inflation. Review your pricing every few months.

4. Use a POS System

Modern point of sale systems can automatically track your costs, margins, and taxes—making recalculating markups simple.

5. Add a Safety Margin

Unexpected costs can creep up—adding a small buffer (like an extra 5%) helps protect your profit.

Common Mistakes to Avoid

Even though it’s simple, many small businesses make small errors that eat into profits. Watch out for:

• Forgetting indirect costs like rent or power.
• Applying markup on wholesale prices without checking retail competition.
• Ignoring seasonal cost changes.
• Failing to update prices after supplier increases.

A quick audit every few months can help you catch these before they hurt your bottom line.

Example: Cost Plus Pricing in Action (Step-by-Step Recap)

Let’s say you own a custom furniture workshop in Perth.

Step 1: Add up your costs for a table.

• Timber and materials: $300
• Labour (10 hours @ $30/hr): $300
• Overheads (rent, electricity, etc.): $50
   Total Cost = $650

Step 2: Decide your markup.
You want a 35% markup to stay competitive but profitable.

Step 3: Apply the formula.
Selling Price = $650 + ($650 × 0.35) = $877.50

You round it to $880.

Now you’ve got a price that covers everything—from materials to labour to profit—and you can confidently quote your customer.

So, Is Cost Plus Pricing Right for You?

If you’re running a small business in Australia and want a simple, reliable way to price your products or services, cost plus pricing is a great place to start.

It’s straightforward, helps you stay profitable, and doesn’t require complex analysis.

However, it’s not perfect for every situation. If your market is highly competitive or you’re selling something premium, you’ll want to balance cost plus pricing with customer value and market trends.

At the end of the day, the best pricing strategy is the one that fits your costs, your customers, and your goals.

Final Thoughts

Pricing doesn’t have to be a guessing game. With cost plus pricing, you’re working from a solid foundation—your real costs. It’s practical, easy to calculate, and ideal for small Aussie businesses that want to keep things simple yet profitable.

Just remember to keep track of your costs, watch your competition, and review prices regularly.

If you’re using a POS system like POSApt, you can even automate some of this. It helps track your cost per item, set markup rates, and ensure your profit margins stay healthy—saving you the headache of manual calculations.

So, next time you’re wondering what to charge for your new product, take a breath, grab your calculator, and start with cost plus pricing—it might just be the straightforward solution you’ve been looking for.