Question 1: What are the differences between cost-based and value-based pricing?
Answer: Cost-based pricing and value-based pricing are two methods that businesses use to be able to price their products and services. When a business uses cost-based pricing they set their prices at a percentage above the cost to manufacture the product or provide the service. Value-based pricing considers the value the product or service they can bring to their customers.
Cost-based pricing is setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk (Kotler, 2008, pg. 288). This method uses the manufacturing and/or production costs as their basis for pricing their product or services. A company’s costs are important in their pricing strategy. Businesses and companies that have low costs can set their prices lower; which will give them an increase in sales and profits. For example, Wal-Mart tries to be a “low-cost producer” in their industry. They have the savings price match app to beat their competitors’ prices. Consumers want to save money and knowing the company is willing to price match for people will definitely increase business.
Value-based pricing is setting prices based on buyers’ perceptions of value rather than on the seller’s cost (Kotler, 2008, pg. 285). When a business uses value-based pricing they consider the value of their product or service, as opposed to what it cost the company to make and produce it. The business will determine how much money and value its product or service will make for the customer(s). Efficiency, happiness, and stability are factors that can determine value. A good example would be car dealerships. There are so many different cars. Certain cars such as a Bentley or Lamborghini are known as expensive cars and cost about $100,000 to $300,000. Compared to a Mazda and a Honda which usually cost about $20,000 to $30,000. For someone like me who is a college student and has a family, I would not be willing to spend over $25,000 for a new car. But, if someone were single and a doctor the value of the Bentley or Lamborghini would be worth paying more for their car.
Cost-based pricing will focus on the businesses situation when they determine pricing. Value-based pricing will focus on the customers when determining their pricing. If a company were to use cost-based pricing, they would price between the price floor and the price ceiling. The price floor and the price ceiling are the minimum and maximum prices for the company’s product or service. If the going competitive pricing is under the price floor the company may price at the floor pricing or they may try to lower costs to lower the floor. Ideally they should try to price between the floor and the ceiling prices.
In conclusion, the market conditions are what dictate the floor and ceiling price and where the company has to set their pricing. If the company decided to use value-based pricing then they try to set prices which are determined by what customers are willing to pay for the product or service. Cost-based pricing usually will result in competitive pricing; companies that use this usually have customers that want inexpensive products or services. Compared to value-based pricing which companies usually earn big profits on items sold. But, if consumers don’t like the price then they are likely not willing to pay the higher prices and may buy from the company’s competitors.
Kotler, P., & Armstrong, G. (2008). Marketing: Managing Profitable Customer Relationships. In Principles of Marketing (Custom ed., pp. 282-329). Upper Saddle River, New Jersey: Pearson.
Question 2: Pricing is based on customer perceptions of value and costs in addition to other internal factors. Discuss these other internal factors and how they might affect the pricing of a new Sony MP# player.
Answer: Pricing gets based on a customer’s