The Markup Manifestation Fallacy

 The cost-plus model has been around for at least 100 years. It’s simple in theory, and seemingly straightforward in practice. At its core, it’s just a formula:

Price = Cost ÷ (1 – Desired Margin)

For example, if you want a 60% margin and your cost per unit is $10, the math is:
$10 ÷ (1 – 0.6) = $10 ÷ 0.4 = $25

Easy, right? But here’s the funny thing: there’s a major fallacy baked into this model. A paradox, really.

The entire premise of cost-plus pricing depends on knowing your costs. And while that sounds reasonable, it’s actually a bit of a trap. I know some operations folks might bristle at this, but I’d argue that you can only truly know your costs in retrospect. I don’t know what my costs will be a year from now. So if I set a price today and don’t touch it for twelve months, I’m unlikely to hit my desired margin. That’s the fundamental flaw: we don’t have a stable, forward-looking grasp of costs—regardless of the industry type tech, services, or manufacturing. Basically costs change due to economic condition.

You’ve got input costs, sure. But you also have fixed costs: buildings, electricity, maintenance, and a dozen other things that sneak into your unit economics. And here’s where it gets messy: price affects volume, and volume affects cost. So when I set a price as a pricing analyst, that price influences demand, which changes volume, which then shifts cost—and ultimately, margin. It’s a feedback loop.

In fact, more than half the time, cost-plus pricing creates a positive feedback loop. Let’s walk through it:

Say I raise my price to maintain a target margin. That price hike reduces volume. Lower volume drives up per-unit costs. Six months later, I raise the price again to chase the same margin. Volume drops further. Costs rise again. And so on. I’m stuck in a cycle that can eventually price me out of the market.

Cost-plus doesn’t necessarily foster profitability. It’s not about maximizing anything—it’s about maintaining a margin. And that’s a problem. In weak markets, cost-plus leads to overpricing. In strong markets, it leads to underpricing. That’s the opposite of what you want in a competitive strategy.

It also assumes you can forecast sales levels with precision. And if you can do that, then sure—you can forecast costs and set profit objectives accordingly. But most pricing professionals know how hard it is to forecast sales. There’s variance. There’s error. There’s reality.

So how do we fix this? Flip the thinking.

Start with value. When you develop a product, ask: Where’s the value? Then ask: What does it cost to deliver that value? That’s a very different mindset than trying to preserve a margin. It’s about building something that’s worth the price—not just justifying the price with cost.

At a pricing conference I attended (don’t quote me on this), it was said that over 50% of companies still use cost-plus. That’s not surprising. But here’s the strategic risk: if your prices are based on costs, and your competitors know the typical margin in your market, they might be able to reverse-engineer your costs. That’s not just a pricing problem—it’s a competitive disadvantage.

Let me end with a story from my undergrad days in environmental and natural resource economics. One of the core concepts in climate science is the positive feedback loop. When we release carbon or other emissions into the atmosphere—even dust—it traps heat. That heat drives behaviors that create more emissions: farmers use more fertilizer, which kicks up more dust; we run our air conditioners harder because it is hotter, which uses more electricity. The loop expands, and the problem compounds.

That’s the same kind of loop I see in cost-plus pricing. It’s subtle, it’s persistent, and if you’re not careful, it can spiral. Don’t let a legacy model dictate your future margins.