Cost-Based Pricing vs Value Based Pricing

984 Words May 4th, 2013 4 Pages
There are several differences between cost-based pricing and value-based pricing. In this essay we will consider a few of them. Value-based pricing is based on the customer’s perception of value rather than the seller’s cost as the key. Cost-based pricing is based on the product. A company comes up with an idea of what they think would be a good product and sets the price after considering all the production costs plus a target profit. (Kotler, Armstrong, 2008, p. 285, 286)
Instead of starting with producing a product or service to price, value-pricing starts with what customers believe the value of a product would be. Then decisions are made regarding the product design and what costs can be acquired. The customer’s perception of value
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Another general pricing objective is customer retention and relationship building. A company might set prices to attract new customers or to profitably retain old ones. They can set the price to keep the loyalty and support of their return customers or drop the price for a specific amount of time to create enthusiasm for a new product in their line. An example of this would be for Sony setting the prices for the MP-3 player, to keep the loyalty of their return customers, however, for a short specific time, dropping their price to create some enthusiasm about this new MP3 player.
Price positioning is when companies position their products on price then adapt other marketing mix choices to the prices they want to charge. In this scenario, price is the fundamental product positioning factor and it distinguishes the product market, competition and design. Target Costing is a positioning strategy that designs a new product, determines its cost and then asks can we sell it at this price. (Kotler & Armstrong, 2008, p.293) This might affect the new Sony MP3 player if it were a new innovative type of player and possessed features that no other MP3 player has. Because of this new innovative player and its costs were $85.00, including profit margin and wondering if it would sell for that price. The answer is YES!!
In conclusion, pricing is determined by customer perception values and other internal factors such as
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