What Is Cost-Plus Pricing?

Cost-plus pricing sets the selling price by adding a markup, usually a percentage, to the unit cost. The arithmetic takes three steps:

• Find the unit cost. This is what one unit costs you to make or buy. Which costs go into it is your decision: the product cost alone, or that cost plus inbound freight, storage and the cost of serving the account.
• Pick a markup. This is the percentage of the unit cost you add as profit.
• Calculate the price. Selling price = unit cost x (1 + markup percentage).

Markup and margin describe the same profit from two sides:

• Markup is the profit divided by the unit cost.
• Margin is the profit divided by the selling price. Shopify calculates gross margin as ([net sales - cost] / net sales) x 100.

A 25% markup is a 20% margin, because the same profit is measured against a larger number.

In US federal contracting, "cost-plus" names a different thing. Under the Federal Acquisition Regulation (FAR), cost-reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. A cost-plus-fixed-fee contract also pays the contractor a negotiated fee that is fixed at the inception of the contract. The FAR also states that the cost-plus-a-percentage-of-cost system of contracting shall not be used.

Cost-plus pricing, the subject of this page, is how a seller sets its own prices. A cost-plus contract is how a government buyer agrees to pay a contractor's costs.

A distributor buys a ball valve for $40.00, including inbound freight. It prices the valve with a 25% markup:

• Price: $40.00 x 1.25 = $50.00
• Profit per unit: $50.00 - $40.00 = $10.00
• Markup: $10.00 / $40.00 = 25%
• Margin: $10.00 / $50.00 = 20%

If the supplier raises the cost to $44.00, the same markup moves the price to $44.00 x 1.25 = $55.00. The profit becomes $11.00, and the margin stays at 20%.

Shopify stores a product's cost in the Cost per item field. Shopify describes the cost per item as how much it costs you for the product or variant: for a product you resell, the price you paid the manufacturer, excluding taxes, shipping, or other costs; for a product you make, a value based on your labor and material costs. If a product has variants, each variant needs its own cost per item.

Shopify notes that the Cost per item field contains static data, so profit reports are only relevant to a specific point in time. For dynamic reporting, one option it lists is running your financial reports in another business system, such as an ERP or accounting system.

For B2B buyers, catalogs set the price. A catalog can apply an overall percentage increase or decrease to the product price and set fixed prices for specific products, and fixed prices override the overall adjustment. On the Basic, Grow and Advanced plans you can assign up to 3 active catalogs across all your B2B markets, and on Shopify Plus you can create an unlimited number of catalogs. Catalog adjustments work from the product price, so a cost-plus price is calculated where your cost records live and reaches Shopify as the product price or a fixed catalog price.

Uncap's guide to B2B ecommerce pricing strategies calls cost-plus "the pricing floor" and names its most common failure: using only direct product cost and ignoring the downstream cost of serving each customer. For Shopify B2B, the guide puts the calculation in the ERP, which maintains the cost records, applies the markup rules and outputs list prices that feed Shopify as the baseline catalog price.

• List price
• Tiered pricing
• Cost of goods sold (COGS)
• Landed cost
• MAP pricing

• FAR 16.306, Cost-plus-fixed-fee contracts (Acquisition.gov)
• Shopify Help Center: Profit reports
• Shopify Help Center: Customizing B2B pricing using catalogs