Which pricing method involves setting prices based on production costs?

The pricing method that involves setting prices based on production costs is cost-based pricing. This approach focuses on calculating the total costs associated with producing a product or service, including direct costs (such as materials and labor) and indirect costs (such as overhead). Once the total cost is determined, a markup is added to ensure a profit margin.

Cost-based pricing is straightforward and provides a clear framework for businesses to ensure that their prices cover costs and contribute to profitability. Since this method emphasizes the actual expenses incurred, it helps businesses maintain financial health, especially for products where production costs are stable and predictable.

In contrast, value-based pricing considers the perceived value of a product to the customer and may not directly relate to production costs. Competitor-based pricing focuses on pricing strategies relative to competitors’ prices, while market-based pricing sets prices based on market conditions and consumer demand rather than underlying costs.