Question

Choose and explain any of the pricing models in your own terms. What are its advantages and disadvantages?

Answer 1

I chose Value based Pricing model. Value based pricing refers to a pricing strategy where price of a product is determined by its value that is perceived by the consumers. Value based pricing is also known as customer-focused pricing strategy because here the price of the product is determined on the basis of its value in the eyes of customers. Value based pricing model is used to check how much customers would be interested to pay for a product.

Value based pricing model can increase the revenue of the company if used properly. A company can charge high prices for the products that holds a good value in the eyes of customers. However, a company can't charge a high price for all its products.The value based pricing works well where consumers' feelings are attached with the brand of the product. For example, if a product has a good brand name and accepted by the consumer, then in that case charging a high price do not affect the purchasing power of the consumer. Such type of brand may be Nike, whose products are of great value in the eyes of its customers.

Advantages:

1. Increases value of the brand: The most important benefit of value based pricing is, it increases the brand value. The higher the price, the superior is the quality of product in the opinion of consumers.

2. Higher profits: Value based pricing helps in boosting the profits of the company. When a customer is satisfied with the value of a product, he/she will be willing to pay any price for it. In that case, the particular company may charge a high price for that product and can earn a higher profit than before.

3. Customer loyalty: Companies can gain customer loyalty by providing them high quality products at a better price that will satisfy customers. Customers feel happy and loyal to a company, when it understand theirs feelings and requirements.

Disadvantages:

1) Niche market: One of the most important demerits of value based pricing is that, a company can sell its products only to a limited number of customers who can afford the high price. A limited number of customers limits the expansion of business.

2) Allow entry to competitors: Another disadvantage of value based pricing is, it will give scope to competitors who can produce the same product and sell it at a lower price. So when the primary company is charging a high price, it may loose some of its customers. In order to get back these customers, the primary company can't even lower the price of its product because it will hamper loyal customers' faith on the company's products.

3) High production cost: Generally, specialized products need high skilled employees to produce. It needs lot of care to produce high quality products that results in higher production cost.