Product Pricing Methods: Advantages and Disadvantages

There are three basic pricing strategies, including cost-based pricing, value-based pricing, and competition-based practice. The primary benefit of a cost-based pricing strategy is simple calculations involved in determining the final price per unit. Additionally, the method ensures the profits for the business since the minimum price is the marginal cost. However, there are certain flaws associated with the strategy because it does not take into account customer demand and competition. The method is usually appropriate for the textile, food industries, and building material production. At the same time, the method is inappropriate in a very competitive business segment.

Value-based pricing is considered a client-centered approach since the price is set based on the benefits it provides to consumers. Companies utilizing the method evaluate how beneficial their product is for the customers. The primary benefit of the approach is an improved image, increased product sales, and the attraction of new customers through differentiation. However, the strategy often fails to consider production costs and competition. The central problem with the approach is that it requires highly trained sales personnel. Therefore, even though the method is valid, it is far from being universal.

Competition-based pricing considers what kind of products other companies are offering. The analysis of the rivals may be advantageous for making evidence-based decisions using the data acquired from the competitors. At the same time, the data helps to gain competitiveness by positioning the product adequately, considering the available offers from other companies in the business. However, the strategy may lead to a loss of profits if an inadequate tracking system is used. Additionally, purchase prices and margins should be taken into account to promote price elasticity.

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