Advantages Of Cost Based Pricing

Pricing is one of the most important components within the theory of marketing mix. The firm’s decision on the price of the product and the pricing strategies impact the consumer’s decision on whether purchase the product. The competition within the market today is extremely high and, for this reason, businesses must consider their competitor’s actions to take advantage in the market. Moreover, the steadily increasing knowledge of internet and IT technologies has made easier to carry out comparisons between different products and services. Companies must be aware of those factors and price their products accordingly. In modern business, there is rarely any one-and-only, now-and-forever, best pricing strategy, which means that some strategies

The most used cost-based approach to pricing a product is cost-plus-pricing, in which the seller sums all the costs for the product or service and then adds an amount to arrive at the selling price. This method, as Solomon underlines, is widely practiced by retailers and wholesalers due to its simplicity: in fact, users only need to estimate the unit cost and add the plus. To value the unit costs a firm must first evaluate its total costs, which are the sum of variable and fixed costs. The first ones vary directly with the level of production: for example, the cost of direct materials goes up in conjunction with increases in production volume. The second ones don’t change with sales and production, but are related with bills for rent, heat, interest, salaries, etc. (Solomon 2012,

If consumers think that the company’s product or service provides greater value compared with competitors, the company can charge a higher price. Otherwise the firm must either charge a lower price or change customers’ perceptions to justify a higher price. The goal is not to match or beat competitors’ price, but is to set prices according to the relative value created versus competitors. For example, Apple makes high-quality consumer electronics: it leads its industry despite charging higher prices than competitors such as Samsung, Huawei, Lenovo and Dell. Indeed, despite Apple’s premium prices, customers believe that Apple give them a lot more value for the price they pay. (Armstrong 2017,