Cost-Plus Pricing and Market-Based Pricing are the ways a Product calculates its selling price. Both are set on the Product Pricing card. Cost-Plus builds the price from Material, Labor, and Machine cost. Market-Based uses a price you set on the Product, or the retail prices on its components. Job cost is stored either way.
Table of Contents
- When to Use Each Pricing Method
- Understanding Market-Based Pricing
- Understanding Cost-Plus Pricing
- Related Articles
When to Use Each Pricing Method
For most sign shop work, Cost-Plus Pricing is the better fit because the selling price follows production cost. Market-Based Pricing fits when the customer price should stay on a fixed list even if cost changes. Review market prices when costs move, because the quote does not.
Use Cost-Plus Pricing when:
a. The quote should cover cost as Material, Machine, or Labor cost changes.
b. You want a consistent margin or markup across jobs.
c. Reports should be based on production cost.
Use Market-Based Pricing when:
a. The customer price comes from a rate sheet or a known per-unit price.
b. The price should stay the same when internal costs change.
c. The quote should be the sum of each component's own retail price.
Understanding Market-Based Pricing
Market-Based Pricing uses a price you set, rather than production cost, to calculate the selling price. It is also called square footage pricing, area-based pricing, or square meter pricing when the unit price is an area rate. Material, Labor, and Machine costs are still stored for reporting. They are not used in the selling-price formula.
Example: a unit price of $2.00 per square foot on a 100-square-foot job calculates to $200.00, even if the material cost changed that week.
Note: Because the selling price stays fixed while production costs change, the profit margin can move, and the price may not cover cost. For most sign shop work, Cost-Plus Pricing is the recommended approach.
Market-Based Pricing has two methods: Market - Product and Market - Component. Custom is a separate method for a formula you write. It is not a market method.
Market - Product
Market - Product multiplies quantity by the unit price on the Product. That unit price is a single amount, or a price from the Unit Price Table when Use Table is on. Component cost and component retail are not used in the selling price. Changing Cost Per, Hourly Cost, or Machine Cost Per Hour changes reported cost. It does not change the quoted price.
Market - Component
Market - Component adds the retail price of each component used on the Product. There is no unit price or margin on the method row. Retail is maintained on the components:
a. Material retail, shown as Retail Per followed by the consumption unit.
b. Labor Setup Price and Hourly Price.
c. Machine Price Per Hour.
If a component has cost filled in and retail left at zero, that component adds nothing to a Market - Component price. Cost-Plus would still use the cost.
Understanding Cost-Plus Pricing
Cost-Plus Pricing adds Material, Labor, and Machine cost, then applies a margin or a markup. Retail fields are not used in the selling price. This is the recommended method for most sign shop work, because the price follows cost.
The two methods are Cost Plus - Margin and Cost Plus - Markup.
How Cost-Plus Pricing Works
Cost-Plus Pricing uses these cost fields:
a. Material Cost Per, times the quantity consumed.
b. Labor Setup Cost and Hourly Cost.
c. Machine Cost Per Hour, times run time.
The calculation then:
1. Adds those costs into a total cost.
2. Applies the margin or markup percentage, or the percentage from a pricing table when Use Table is on.
3. Adds optional charges, such as custom waste, when the Product includes them.
4. Applies Minimums, Fees, and Discounts from the Pricing panel. Those extras can be layered on any pricing method.
Cost Plus - Margin
Cost Plus - Margin treats the percentage as the share of the selling price that is profit.
Price = Total Cost divided by (1 - Margin %)
Example: a total cost of $80.00 with a 20% margin is $80.00 divided by (1 - 0.20), which is $100.00.
Cost Plus - Markup
Cost Plus - Markup adds the percentage on top of cost.
Price = Total Cost times (1 + Markup %)
Example: a total cost of $80.00 with a 25% markup is $80.00 times 1.25, which is $100.00. A 20% markup on that same cost is not $100.00. Margin and markup are not interchangeable.