Cost-plus pricing for wholesale: a worked example

The formula, and which cost to start from

Cost-plus has two inputs: a cost and a markup. Both need care.

The cost should be landed cost, the full cost of getting the item onto your shelf and ready to sell. That is the supplier’s invoice price plus freight in, duties and handling you can attach to the item, less any rebate that belongs to it. Starting from the bare invoice price makes every margin look better than it is.

The markup is a percentage of cost, not of price. If you want to think in margin, convert it: a 30% markup is a 23.08% margin, and a 30% margin needs a 42.86% markup. The markup versus margin guide has the conversion tables.

One markup does not fit every product

A single markup across the whole catalogue is simple, but it prices the items customers compare most (the commodities they can see in a competitor’s flyer) the same as the items nobody compares. Distributors usually set a markup by product family. Here is what three families might look like:

The commodity line earns a thin 10.71% margin and the specialty line 37.50%. That is deliberate: the commodity price is the one the customer judges you by, and the specialty price is one they rarely question. The point of cost-plus by family is that the choice is made once, on purpose, rather than line by line at the counter.

Adding the customer: a markup matrix

The next step is to let the markup depend on the customer as well as the product. A matrix of product class against customer tier gives each combination its own markup. A volume contractor gets a lower markup than a walk-in customer on the same item.

This is cost-plus with a price book attached: nine markups instead of one, written down so every salesperson applies the same one. The price book guide covers how to keep such a matrix current.

Why distributors use cost-plus

• It is fast. With thousands of items, nobody can research a market price for each one. A rule prices the whole catalogue.
• It is consistent. The same item, the same customer tier and the same rule give the same price, whoever quotes it.
• It protects margin by construction. Every price carries a known markup over cost, so no item is sold below cost by accident.
• It is easy to explain and to audit. You can show a customer, an auditor or a new salesperson exactly how a price was built.
• It adapts to cost changes. When a supplier raises a price, you update the cost and the rule produces the new price.

Where cost-plus falls short

Cost-plus looks only at your cost. It does not see what the customer is willing to pay, what competitors charge or what it costs you to serve the order. Four problems follow.

• It ignores the market. On items customers compare, a price built from cost can be too high and lose the sale. On items they do not compare, it can be too low and leave margin on the table.
• It ignores cost to serve. A small order that needs picking, packing and a special delivery costs more to handle than a pallet, though the product cost is the same.
• It lags behind cost changes. If the cost basis is last purchase price or average cost, the price may still reflect a cost you can no longer buy at.
• It can hide inefficiency. If every cost is passed through, an expensive supplier or a wasteful process is never challenged.

The lag is the one that costs money quietly. Suppose you bought 100 units at $10.00 and priced them at 30% over cost: $13.00. The supplier then raises its price and the next unit costs $11.50. Your books still show a 23.08% margin on the units you bought at $10.00, but every sale now has to pay for a unit that costs $11.50 to replace, so the margin on replacement cost is ($13.00 − $11.50) ÷ $13.00 = 11.54%. Pricing at replacement cost plus the same 30% gives $11.50 × 1.30 = $14.95.

Variations that make cost-plus work better

• Target margin instead of markup. If your goals are expressed as margin, price = cost ÷ (1 − margin). A 25% target margin on $60.00 is $60.00 ÷ 0.75 = $80.00.
• A margin floor. Whatever the rule produces, do not let the price fall below a minimum margin, so a stack of discounts cannot take a line under water.
• A minimum line charge. For very small orders add a flat handling amount, so a low-value line still covers its cost to serve.
• Market checks on key items. Keep cost-plus for the long tail and look at the market price of the few items customers compare most.
• Price on replacement cost. For items whose cost moves often, base the price on what it costs to replace, not on what you paid last time.

Common mistakes

• Starting from invoice price instead of landed cost.
• Confusing markup with margin, and ending up with less margin than planned.
• One markup for the whole catalogue, regardless of how visible the price is.
• Not repricing when costs change, so margin shrinks without anyone deciding it should.
• Letting salespeople override the rule without a record of why.
• Rounding the markup rather than the final price.

Checklist: before you adopt a cost-plus rule

• Is the cost a landed cost, and is it current?
• Is the rule written down as a markup or a margin, with the label?
• Does each product family have a markup chosen on purpose?
• Do customer tiers change the markup in a defined way?
• Is there a margin floor, and what happens when a price would fall below it?
• Who updates costs and prices, how often, and where is the change recorded?

Applying the rule on every quote

A cost-plus rule is only as good as its application. On a request with fifty lines, someone has to find each item, pick the right cost, look up the customer’s tier and apply the right markup without a slip.

Qotora AI applies the price rules you define to the lines it finds in your own catalogue, including customer tiers, margins and discounts. Every price traces back to your own data. A person on your team reviews the quote before anything leaves.