Cost-Plus Pricing: What Companies Use When They Don't Have a Strategy
Price-Volume-Profit Asymmetry: The High Cost of a Small Discount
We have all heard the line in a sales meeting
"Let us shave five per cent off and get the order over the line."
At first, it sounds perfectly sensible.
The order is not lost.
The customer does not go to a competitor.
The revenue target survives.
But one question is usually missing from the room:
What will this sale actually leave behind?
Because a discount does not come out of the price. It comes out of the profit.
Suppose a product sells for 100 and has a variable cost of 80. The contribution per unit is 20.
Reduce the price to 95 and the customer receives a five per cent discount. The company, however, sees contribution fall from 20 to 15.
The price has fallen by five per cent. Contribution has fallen by 25 per cent.
To preserve the same total contribution, volume must rise by 33.3 per cent.
A discount looks small to the customer and large to the company. The customer receives it from revenue; the company funds it from profit.
Most businesses do not lose margin because they cannot do the arithmetic. They lose it because, under pressure, they choose not to look at it.
The sale must not be lost.
The customer must not defect.
The revenue target must be met.
The factory must not sit idle.
Each argument can sound reasonable in isolation. Taken together, they turn price from a strategic decision into a concession used to remove friction from the sale.
Price is not an ordinary line in the profit and loss account. McKinsey has repeatedly highlighted that, on average and assuming no loss of volume, a one per cent increase in price can translate into an 8.7 per cent increase in operating profit. It also estimates that up to 30 per cent of the thousands of pricing decisions companies make each year fail to produce the best available price.
That is not an instruction to raise every price by one per cent. The result depends on price sensitivity, differentiation, competitive alternatives, capacity utilisation and demand elasticity.
The point is simpler: price has a far greater effect on profit than most companies behave as though it does.
Yet many businesses still price through one familiar equation:
Cost + target margin = selling price
The equation is easy. Finance calculates the cost. Management chooses the margin. The sales team takes the result to the customer.
If the customer accepts it, the order is booked.
If the customer objects, discounting begins.
The problem is that cost-plus pricing looks only from the inside out.
It knows what the product cost to make, but not what it is worth to the customer.
It knows what the company wants to earn, but not what the market is prepared to pay.
It knows the target margin, but not the customer's alternatives, total cost of ownership, price sensitivity or buying behaviour.
The pressure now visible in Turkish manufacturing makes the weakness of this logic especially clear. In June 2026, the Istanbul Chamber of Industry Türkiye Manufacturing PMI fell from 49.8 to 47.1 as new orders weakened and business conditions deteriorated. Input costs continued to rise sharply, while selling-price inflation eased. In plain terms: costs were still moving upwards, but soft demand limited manufacturers' ability to pass those increases on.
This is where cost-plus pricing collides with commercial reality.
On paper: new cost + target margin = new price
In the market: new cost + customer resistance + competitor pricing + demand conditions + discount authority = realised price
The difference between the two is paid for by the company's profitability.
Cost-plus can be a calculation method. It is not, by itself, a pricing strategy.
Cost tells you what a product cost to make. It does not tell you what the product should sell for.
How Do You Spot It in Your Own Business?
A pricing problem rarely appears only in the discounts approved by sales. It also appears in the profit and loss account and in the right KPIs.
If revenue is rising while gross margin is falling, the business may be selling more and earning less on every sale.
If contribution margin is weakening, volume growth is not recovering the value surrendered through price concessions.
If the gap between list price and realised net price keeps widening, the company has one price on paper and another in the bank.
Rebates, retrospective bonuses, free product, free freight and extended payment terms all create price leakage - even when the headline invoice price appears intact.
If selling prices are not keeping pace with input costs, the price-cost spread narrows and profitability erodes quietly.
That is why revenue cannot be read on its own. Gross margin, contribution margin, net price realisation, price leakage, the price-cost spread and customer-level profitability must be read together.
The real question is not how much you sold. It is how much value each unit actually left in the business.
Now, Let Us Pull a Rabbit Out of the Hat
Whenever I hold a senior executive role, I do not allow a price reduction to be judged on sales optimism alone.
First, I calculate the contribution lost through the discount. Then I calculate the extra volume required to recover it.
A five per cent discount is not recovered by selling five per cent more. Depending on the starting contribution margin, it may force the company to sell 20, 30 or even 100 per cent more just to stand still.
To make that asymmetry visible, I use FIKAS - the Price Discount Profit Asymmetry Score, a KPI I developed and have applied in every company in which I have held a senior executive role.
FIKAS = Expected volume growth / Required break-even volume growth x 100
Required break-even volume growth = Discount rate / (Starting contribution margin - Discount rate)
A score below 100 means the expected volume increase does not recover the margin surrendered. The company may sell more units, use more labour, consume more capacity and tie up more working capital - yet still earn less.
I do not treat 100 as an automatic approval threshold. Sales forecasts can be wrong, and extra volume brings production, logistics, credit and collection risk. The decision needs a margin of safety.
FIKAS decision bands
Score
Decision meaning
Below 100
Value-destructive: the forecast volume does not replace the contribution lost.
100-120
Fragile: the economics are too close to break-even to absorb forecast error and execution risk.
Above 120
Financially defensible: the discount has cleared the first economic test, subject to operational and credit checks.
FIKAS matters most when commercial pressure is at its highest. Month-end targets, idle capacity, fear of losing a customer and anxiety about protecting revenue can push managers towards concessions they would reject in calmer conditions.
I remove that pressure from personal judgement and place it inside pre-agreed decision thresholds.
Revenue is no longer allowed to stand alone as proof of success. Net realised price, contribution margin, working-capital burden and customer profitability appear on the same decision screen.
That makes it possible to distinguish genuine growth from a high-volume order that merely creates a revenue illusion.
The fear of losing a customer must also be judged across the customer portfolio and total profitability - not through the emotional weight of a single order.
Not every lost sale is a loss.
Some sales leave the business healthier when they are not won.
FIKAS is not used only to approve or reject the discount. The promised volume and the profit actually delivered are reviewed afterwards. A discount is not proven at the moment the order is signed; it is proven when the expected economics appear in the accounts.
No price concession should be approved before one question has been answered:
Is the volume required to recover the lost margin genuinely achievable?
If it is not, the decision is not pricing.
It is a decision to give up profit.
Conclusion
The real problem is not losing a customer.
It is being so unable to manage price that you are afraid to lose a customer who does not make you money.
A company that cannot defend its price hands its margin to sales pressure and its profit to the revenue target.
Machines run. Overtime is worked. Raw materials arrive. Finished goods leave the gate.
Revenue grows.
But the growth is financed not by profit, but by stock, receivables, debt and working capital.
At that point, the company is no longer selling to the customer.
It is financing the customer with its own capital.
Capital is sacrificed for the sake of a revenue illusion.
As the warning on American wing mirrors puts it:
Objects in mirror are closer than they appear.
Do not mistake running machines for growth, or rising revenue for profit.
Insolvency, too, is often closer than it appears.
Editorial and Intellectual Property Notice
This English-language article is an original work by Orkun Akçasarı. Its title, structure, narrative, original analysis, interpretation of price-volume-profit asymmetry, management perspective and decision architecture were authored and arranged by Orkun Akçasarı.
The FIKAS - Price Discount Profit Asymmetry Score framework described here - including its name, abbreviation, calculation structure, decision bands and management application - was developed by Orkun Akçasarı from practical senior executive experience and is first presented publicly in this integrated form in this article.
The article, or any substantial original part of it, should not be reproduced, adapted, republished or used within commercial training, consultancy, software or corporate management products without clear attribution to the author and the first publication source, except where applicable law permits quotation or other limited use.
All research, statistics, institutional names and third-party works cited remain the property of their respective rights holders. No exclusive rights are claimed over established pricing principles, arithmetic relationships, ideas, procedures, methods of operation or mathematical concepts. This notice records authorship of the original expression, naming, selection, arrangement and integrated management framework presented in the article.
© Orkun Akçasarı. All rights reserved.
Sources
1. McKinsey & Company - Walter Baker, Dieter Kiewell and Georg Winkler, "Using Big Data to Make Better Pricing Decisions", 1 June 2014.
2. McKinsey & Company - Brian Elliott, Nicolas Magnette, Shamik Bandyopadhyay, Matt Cherry and Nidhi Bagri, "B2B Pricing: Navigating the Next Phase of the AI Revolution", 7 April 2026.
3. Istanbul Chamber of Industry, "ICI Released Türkiye Manufacturing PMI June 2026 and Türkiye Sector PMI Reports", 1 July 2026.
4. World Intellectual Property Organization, "What Can I Protect with a Copyright?"
https://www.wipo.int/en/web/copyright/protection
5. Republic of Türkiye, Legislation Information System, Law No. 5846 on Intellectual and Artistic Works.
https://www.mevzuat.gov.tr/mevzuat?MevzuatNo=5846&MevzuatTertip=3&MevzuatTur=1
6. Electronic Code of Federal Regulations, 49 CFR § 571.111 - Standard No. 111, Rear Visibility.
https://www.ecfr.gov/current/title-49/subtitle-B/chapter-V/part-571/subpart-B/section-571.111
Accessed 24 July 2026.