Difference between cost based pricing and value based pricing?

Answer 1

There are two basic methods of pricing of any products and services: cost-based and value-based pricing. The best choice depends on your type of business, what influences on customers to buy and the nature of the competition. This takes the cost of producing any product or service and adds an amount that we need to make a profit. This is usually expressed as a percentage of the cost. It is generally more suited to businesses that deal with large volumes or which operate in markets dominated by competition on price. But cost-based pricing ignores our image and market positioning. And hidden costs are easily forgotten, so our true profit per sale is often lower than we realise. This focuses on the price we believe customers are willing to pay, based on the benefits our business offers us. Value-based pricing depends on the strength of the benefits we can prove our offer to customers. If we have clearly-defined benefits that give us an advantage over our competitors, we can charge according to the value of our offer customers. While this approach can prove very profitable, it can alienate potential customers who are driven only by price and can also draw in new competitors.