The practice involves determining the total cost of a product or service and then adding a predetermined markup to that cost. The markup, typically expressed as a percentage, represents the desired profit margin. For example, if a product costs $100 to produce and the desired markup is 20%, the selling price would be $120.
This method provides a straightforward way to ensure profitability and cover all expenses. Its simplicity makes it particularly appealing to businesses new to pricing strategy or those operating in industries with stable costs. Historically, it has been prevalent in government contracting and industries where cost transparency is valued, providing assurance of a fair return on investment.