Cost-Based Pricing vs Value Based Pricing
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 and decisions about the product design and how much they can spend on it, combined with variables within the marketing mix are all considered before the production of the actual product. For example, as Kotler and Armstrong (2008) point out that the customer perceived value of the Bentley GT, although an incredibly great value, with over $300,000. in its cabin workmanship and engine, is priced at $150,000. and has a six month waiting list. p.286 Customer’s value perception of the Bentley name, quality and reputation is very high.
Cost-based pricing, on the other hand, is set within a company, after taking all of the production, distributing, selling and the product’s profit into consideration. The lower the costs of production a company spends the lower they can set the price and become competitive. If they can set the cost below their competitors, they will even a competitive advantage. If a company’s costs exceed their competitors costs for the product it puts them at a competitive disadvantage and they are likely to lose money. For example, if I have a company that makes a miniature ice-scraper designed to use on lottery scratchers and the total production cost from start to finish is $.75,each, including the
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 and decisions about the product design and how much they can spend on it, combined with variables within the marketing mix are all considered before the production of the actual product. For example, as Kotler and Armstrong (2008) point out that the customer perceived value of the Bentley GT, although an incredibly great value, with over $300,000. in its cabin workmanship and engine, is priced at $150,000. and has a six month waiting list. p.286 Customer’s value perception of the Bentley name, quality and reputation is very high.
Cost-based pricing, on the other hand, is set within a company, after taking all of the production, distributing, selling and the product’s profit into consideration. The lower the costs of production a company spends the lower they can set the price and become competitive. If they can set the cost below their competitors, they will even a competitive advantage. If a company’s costs exceed their competitors costs for the product it puts them at a competitive disadvantage and they are likely to lose money. For example, if I have a company that makes a miniature ice-scraper designed to use on lottery scratchers and the total production cost from start to finish is $.75,each, including the