Major Pricing Strategy

There are three types of pricing strategy: customer value–based pricing, cost-based pricing, and
competition-based pricing.

Customer Value–Based Pricing

Now let’s move to the first strategy which is customer value based pricing. Usually, the
customers would buy a product if they think that its price is suitable with its value. Therefore,
marketers need to understand how much value consumers place on the benefits they receive
from the product first before setting a price that captures that value. So basically, customer
value based pricing is setting price based on buyers’ perceptions of value rather than on the
seller’s cost.

There are two two types of value-based pricing: good-value pricing and value-added pricing.

 Good-Value Pricing
Is offering customers products and services at a reasonable price. This strategy involves
introducing less-expensive versions of established brand name products or redesigning existing
brands to offer more quality for a given price or the same quality for less.

 Value-Added Pricing
Meanwhile in value-added pricing, Rather than cutting prices to match competitors, they add
quality, services, and value-added features to differentiate their offers and thus support their
higher prices.

Cost-Based Pricing
The second strategy is cost-based pricing. This strategy invloves setting prices based on the costs
of producing, distributing, and selling the product plus a fair rate of return for the company’s
effort and risk.

Usually, costs in production vary at different levels of production due to a number of factors
such as scale, efficiency, equipment, and technology.

1. Small-Scale Production:
Small-scale production is typically the most expensive level of production due to its
lack of efficiency and economies of scale. Small-scale producers have to bear the
full cost of machinery, equipment, and manpower, and they do not benefit from the
cost-savings that come with higher levels of production. Additionally, small-scale
producers often lack the resources for efficient management and distribution
systems, which can drive up costs further.

2. Medium-Scale Production:
Medium-scale production is typically the most cost-efficient level of production, as it
combines the benefits of scale with the flexibility of smaller operations. Medium-scale
producers have access to economies of scale, which allows them to reduce costs by
 producing larger quantities, but they also retain some of the flexibility and
adaptability of smaller operations.

3. Large-Scale Production: Large-scale production is the most efficient level of production

and typically has the lowest costs per unit produced. Large-scale producers have access
to economies of scale and can benefit from more advanced technology and equipment
that reduces costs further. Additionally, large-scale producers have the resources for
efficient management and distribution systems, which contribute further to cost
reduction.

The simplest pricing method is cost-plus pricing, which involves adding a standard markup to
the cost of the product. The basic formula for cost-plus pricing is as follows:

Price = Total Cost of Production x Markup

The markup is typic ally a percentage that is added to the total cost of production to cover
overhead costs and generate a profit.

The key advantage of cost-plus pricing is that it is a straightforward and transparent method for
pricing products or services. Customers are able to see the exact costs that go into producing a
product and understand why they are paying a certain price. This can help to build customer
trust and loyalty by showing that the company is not overcharging customers and that they are
getting a fair deal.

However, cost-plus pricing can be limiting for companies in that it does not allow for much
flexibility when it comes to pricing strategies. It can be difficult to respond to changes in the
market or demand, and it can be challenging to adapt to changing product or service offerings.
Additionally, cost-plus pricing can be vulnerable to fluctuations in input costs, which can affect
the profitability of the product or service.

Another cost-based pricing approach is break-even pricing (or target return pricing), a strategy
where the firm sets a price at which it will break even or make the target return on the costs of
making and marketing a product.

Target return pricing uses the concept of a break-even chart, which shows the total cost and
total revenue expected at different sales volume levels. The break-even point reflects the point
at which revenues equal variable costs. At the break-even point, these variable costs are
completely covered by revenues, and the business generates no profit or loss. The number of
units that the company must sell at the break-even point is called the break-even volume, which
can be calculated using this formula:

If the company wants to make a profit, it must sell more units than the break-even volume. And
the higher the price that the company want to charge, the more number of units they must sell
rises.
Competition-Based Pricing
And the 3rd strategy is competion-based pricing. This pricing involves setting prices based on
competitors’ strategies, costs, prices, and market offerings. Consumers will base their
judgments of a product’s value on the prices that competitors charge for similar products.

In assessing competitors’ pricing strategies, the company should ask 2 questions:

1. How does the company’s market offering compare with competitors’ offerings in terms
of customer value?
2. How strong are current competitors and what are their current pricing strategies?