Question

As a sale market manager for a company, contemplate whether prices should reflect the value the customers are willing to pay or whether they should be based upon the cost of the product or service to your company. How would you support this with an example of your product or service to substantiate your position?

Answer 1

Pricing are classified as:

• Value-based pricing.
• Pricing based on cost (time and materials).

First, let’s start by defining what value-based pricing and cost-based pricing mean.

Value-based pricing is a selling approach where you sell a project based on its value to the client. The idea is to frame the project as an investment in future value

Cost-based pricing means getting paid on time and materials—an hourly rate plus expenses

Advantages and Disadvantages of Value based Pricing:

Advantages

• Increases profits: This method results in the highest possible price that you can charge, and so maximizes profits.
• Customer loyalty: Despite the high prices charged, you can achieve extremely high customer loyalty for repeat business and referrals, but only if the service or product provided justifies the high price.

Disadvantages

• Niche market: The very high prices to be expected under this method will only be acceptable to a small number of customers.
• Not scalable
• Competition: Any company that persistently engages in value based pricing is leaving a great deal of room for competitors to offer lower prices and take away their market share.
• Labor costs

Advantages and Disadvantages of Cost based Pricing:

Advantages

• Simple: It is quite easy to derive a product price using this method
• Assured contract profits
• Justifiable

Disadvantages

• Ignores competition
• Product cost overruns
• Contract cost overruns
• Ignores replacement costs