Distinguish between value based pricing and cost based pricing
Value-based pricing usually results in very high prices and resultant high profits (Bragg). It is usually applied to very specialized services or luxury (prestige) products such as the Rolex (Bragg). Cost-based pricing approaches include mark-up pricing and cost-plus pricing, among others, while value-based pricing include perceived value pricing and performance-based pricing ("Customer Value-Based Pricing Strategies: Why Companies Resist"). Cost-based pricing has several advantages including the following: The approach makes use of readily available costing data hence the price setting process is done on a rational basis; because there is a rational basis of price setting, the process of cost-based pricing is considered to be stable; this pricing approach does not require advanced knowledge to apply which is why many companies first adopt cost-based pricing when they are unaware of any other approaches; it is a quick method to apply; and it is considered to yield prices that guarantee reasonable or fair margins (Liozu).
Cost-based pricing does have disadvantages, among them the following: this strategy does not take into consideration competitors and customers in making pricing decisions which means that firms can lose out on earning money on account of failing to capture value; it is driven by internal factors; it is static; it relies heavily on the finance and accounting functions of a firm (which sometimes struggle to put together accurate cost models due to difficulty in cost budgeting and definition of standard costs) for pricing decisions ; and it is highly dependent on cost accounting methods and information systems (Liozu). gov/wp-content/uploads/2017/07/pricingcostbasedvaluebasedpricing. pdf. Accessed 20 Nov 2018. Bragg, Steven. "Value Based Pricing". "A Reality Check On Cost-Based Pricing Versus Value-Based Pricing". The Journal Of Professional Pricing, 2017, https://pricingsociety.
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