What is cost-based pricing?

With a cost-based pricing approach, a company sets its product prices based on the costs involved in making an item available for sale. The total cost incurred for the product establishes the price floor, or the price at which the seller breaks even, according to the Houston Chronicle.

Typically, a company adds a percentage of the costs of goods to the costs, in order to establish the desired income on each sale. If costs for a good are $10, for instance, with a 30 percent markup, the selling price is $13. This pricing strategy is common in mass production or resale environments, notes the Houston Chronicle, where high-quality or customization isn't common.