Accounting for costs: What is marginal cost pricing?

When companies want to optimize their pricing to cover their costs, marginal cost pricing is the first strategy that pops up. If you want to compete through pricing, marginal costs are a key consideration. But how does marginal cost pricing work as a strategic choice?

What is marginal cost pricing?

Marginal cost pricing is the practice of setting a price equal to the cost of producing another unit. Each product or service is priced at the marginal cost of producing/delivering it.

“Marginal” cost specifically refers to the additional cost of producing one more product. Or, it can mean the cost of one more unit of a good or funding the provision of one more service.

The theory behind marginal cost pricing is that prices will consistently reflect the actual cost of production. This ensures efficient resource allocation, avoiding…