Differences Between Value-Based Pricing and Cost-Based Pricing

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Explain the differences between value-based pricing and cost-based pricing.
Businesses have methods by which to price their products and services. Value-based pricing and cost-based pricing are two common strategies companies use to promote goods and services. Setting the right prices is the key to effective marketing as well as to long-term profitability. Both of these approaches have strengths and weaknesses relative to the other. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Value-based pricing takes a different approach, considering the potential value the product or service will bring to its customers.
Value-Based Pricing
A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or values its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy.
Cost-Based Pricing
Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a specific product or service; they serve as a price range. If the market conditions are such that the going competitive price is under the price floor, the company may price at the floor or attempt to lower its costs to lower the floor. But ideally, the company should price somewhere in between the floor and the ceiling, according to the McDonough School of Business. Many companies that…...

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