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Cost Based Pricing and Value Based Pricing

Cost-based pricing determines a product's selling price by adding a profit margin to the total manufacturing costs. The profit margin can be either a fixed amount or percentage of costs. This ensures costs are covered and profits are generated consistently. However, it may lead to underpricing and ignore customer value perceptions. Value-based pricing primarily bases price on a customer's perceived value rather than costs. Companies determine how much customers believe a product is worth and price accordingly. This approach is best for unique products that enhance customers' image or experiences. To use it, companies must differentiate their product, focus on customers, and obtain feedback on value through open communication.

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973 views

Cost Based Pricing and Value Based Pricing

Cost-based pricing determines a product's selling price by adding a profit margin to the total manufacturing costs. The profit margin can be either a fixed amount or percentage of costs. This ensures costs are covered and profits are generated consistently. However, it may lead to underpricing and ignore customer value perceptions. Value-based pricing primarily bases price on a customer's perceived value rather than costs. Companies determine how much customers believe a product is worth and price accordingly. This approach is best for unique products that enhance customers' image or experiences. To use it, companies must differentiate their product, focus on customers, and obtain feedback on value through open communication.

Uploaded by

Kunwer Taiba
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Cost based pricing and value based pricing

Cost based Pricing


Cost based pricing is one of the pricing methods of determining the selling price of a product by
the company, wherein the price of a product is determined by adding a profit element
(percentage) in addition to the cost of making the product. It uses manufacturing costs of the
product as its basis for coming to the final selling price of the product. In Cost Based Pricing,
either a fixed amount or a percentage of the total product manufacturing cost is added as profit to
the cost of the product to arrive at its selling price.
Cost Based Pricing Methodology:
The floor and ceiling prices are determined as shown above. These are the minimum and
maximum prices that a seller will demand from the buyer for a specific product or service. They
serve as the available price range. Depending on the company and market situation, the price is
then determined.
Example (with calculation):
Total cost of product = total variable cost + total variable cost
= $ 200 + $ 50 = $ 250
Profit margin (Markup) = 25%
Selling price = Total cost of product + profit margin
= 250 + 250 (25/100)
= $ 312.5
This $ 312.5 will be price floor. The price ceiling will depend on the competitive status,
company’s situation and perceived value of the product. This is how Cost based pricing works in
a typical business.
Advantages of Cost Based Pricing:
• A straight-forward and simple strategy
• Ensures that all production and overhead costs are covered before profits are calculated
• Ensures a steady and consistent rate of profit generation
• To find the maximum possible cost of product manufacturing allowable if the final selling price
is fixed
• To find the price of the customized product which has been produced as per the specifications
of a single buyer
• In cases where the customers have enough knowledge about product costs and thus have an
upper hand
Disadvantages of Cost Based Pricing:
• May lead to under priced products
• May sometimes ignore consumer's role in the overall market
• May ignore the opportunity cost of the investment

Value vs cost based pricing

Value based pricing :


Value-based pricing is a strategy of setting prices primarily based on a consumer's perceived
value of a product or service. Value pricing is customer-focused pricing, meaning companies
base their pricing on how much the customer believes a product is worth.

Value-based pricing is different than "cost-plus" pricing, which factors the costs of production
into the pricing calculation. Companies that offer unique or highly valuable features or services
are better positioned to take advantage of the value pricing model than companies which chiefly
sell commoditized items.

Note
● Value-based pricing is a strategy of setting prices primarily based on a consumer's
perceived value of the product or service in question.
● Value pricing is customer-focused pricing, meaning companies base their pricing on how
much the customer believes a product is worth.
● Companies that offer unique or highly valuable products and features are better
positioned to take advantage of the value pricing model than companies which chiefly
sell commoditized items.
Understanding Value-Based Pricing
Examples of Value-Based Markets
The fashion industry is one of the most heavily influenced by value-based pricing, where value
price determination is standard practice. Typically, popular name-brand designers command
higher prices based on consumers' perceptions of how the brand affects their image. Also, if a
designer can persuade an A-list celebrity to wear his or her look to a red-carpet event, the
perceived value of the associated brand can suddenly skyrocket. On the other hand, when a
brand's image diminishes for any reason, the pricing strategy tends to re-conform to a cost-based
pricing principle.Other industries subject to value-based pricing models include name-brand
pharmaceuticals, cosmetics, and personal care.

The value-based pricing principle mainly applies to markets where possessing an item enhances
a customer's self-image or facilitates unparalleled life experiences. To that end, this perceived
value reflects the worth of an item that consumers are willing to assign to it, and consequently
directly affects the price the consumer ultimately pays.

Although pricing value is an inexact science, the price can be determined with marketing
techniques. For example, luxury automakers solicit customer feedback, that effectively quantifies
customers' perceived value of their experiences driving a particular car model. As a result, sellers
can use the value-based pricing approach to establish a vehicle's price, going forward.

Characteristics Needed for Value-based Pricing


Any company engaged in value pricing must have a product or service that differentiates itself
from the competition. The product must be customer-focused, meaning any improvements and
added features should be based on the customer's wants and needs. Of course, the product or
service must be of high quality if the company's executives are looking to have a value-added
pricing strategy.

The company must also have open communication channels and strong relationships with its
customers. In doing so, companies can obtain feedback from its customers regarding the features
they're looking for as well as how much they're willing to pay

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