Cost plus pricing involves adding a markup to the cost of goods and services to arrive at a selling price.

Under this approach, you add together the direct material cost, direct labor cost, and overhead costs for
a product, and add to it a markup percentage in order to derive the price of the product.

Suppose that a company sells a product for $1, and that $1 includes all the costs that go into making and
marketing the product. The company may then add a percentage on top of that $1 as the “plus” part of
cost-plus pricing. That portion of the price is the company’s profit.

As long as whomever is calculating the costs per user or item is adding everything up correctly, cost plus
pricing ensures that the full cost of creating the product or fulfilling the service is covered, allowing the
mark-up to ensure a positive rate of return.

Price rigidity refers to a situation where the price of a good does not change immediately or readily to
the new market-clearing price when there are shifts in the demand and supply curve.

Rigidity occurs when a price is fixed in nominal terms for a relevant period of time. For example, the
price of a particular good might be fixed at $10 per unit for a year. Partial nominal rigidity occurs when a
price may vary in nominal terms, but not as much as it would if perfectly flexible.