MKTG1001 Lecture Notes - Price Ceiling, Ikea, Marketing Mix
Question 5:
a) Explain the difference between cost-based pricing and value-based pricing. Illustrate with an
example of each (4 marks).
Customer value-based pricing involves setting the price based on buyer’s perceptions of
value, rather than the sellers cost (A, A, D, K, 2015). This means the marketer cannot design
the product and marketing program and then set the price- the price must be considered
before the marketing program is set. A company who uses value-based pricing must find out
what value buyers assign to different competitive offers, and use this to determine the
perceived value of a product, and align the price to match. This could be by asking
consumers how much they would pay. There are two types of value-based pricing: good-
value pricing and value-added pricing. Good-value pricing is used when marketers offer just
the right combination of quality and good services, that customers want at a fair price. In
many cases, this has involved introducing less-expensive versions of established brand name
products. For example, Samsung offers the Samsung J3 for $129 as an alternative to the
Samsung Galaxy S7, for a fraction of the cost. Other businesses use value-added pricing,
adding more features and services to differentiate their offers and add more value, rather
than cutting prices to match competitor’s prices. For example, the S7 costed roughly $100
more than the iPhone 7, but featured a SD slot to increase memory- something that was not
available in the iPhone line, that meant consumers had to pay more for increased storage.
Cost-based pricing involves setting prices based on the costs of producing, distributing and
selling the product, and adds a fair rate of return for its effort and risk. The company must
take into consideration the fixed and variable costs of making the product available to end
users. Fixed costs do not vary with production or sales levels, such as rent, whereas variable
costs vary with the level of production- such as packaging. These two costs make up the total
costs, which management should aim to cover. The simplest pricing method is cost-plus
pricing, which involves adding a standard mark up to the cost of the product. For example, a
car may cost $20 000 to manufacture and sell, but the car company will sell it for $30 000.
This is a 50% mark up on cost- and allows the company to essentially make a return. Another
pricing cost-based pricing method is the breakeven method, which finds the point of sales at
which no revenue is made, but no loss is incurred, in order to determine how many items
must be sold to reach a point of profit. This method does not take into consideration
customer value or the relationship between price and demand, therefore should not be used
on its own.
Value-based pricing begins with the company assessing customer needs and value
perceptions, by studying the marketplace, and then setting the target price to match
customer perceived value. They then determine the costs that can be incurred, and design a
product to deliver the desired value at the targeted price. Thus, pricing begins with analysing
consumer needs and value perceptions, and setting this price to match the consumers’
perceived value. For example, in designing the S7, Samsung needed to study competitor
prices and customer perceptions and then design a the phone to deliver this value at the
targeted price that customers perceive to be of good value. Alternatively, value-based
pricing reverses this process, beginning with the company designing a good product and
adding up costs of making the product. They then take this cost into consideration to set a
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Document Summary
Question 5: explain the difference between cost-based pricing and value-based pricing. Illustrate with an example of each (4 marks). Customer value-based pricing involves setting the price based on buyer"s perceptions of value, rather than the sellers cost (a, a, d, k, 2015). This means the marketer cannot design the product and marketing program and then set the price- the price must be considered before the marketing program is set. A company who uses value-based pricing must find out what value buyers assign to different competitive offers, and use this to determine the perceived value of a product, and align the price to match. This could be by asking consumers how much they would pay. There are two types of value-based pricing: good- value pricing and value-added pricing. Good-value pricing is used when marketers offer just the right combination of quality and good services, that customers want at a fair price.
