Pricing is the key aspect that determines the competitive ability of a business given that clients compare the costs of products among providers before making a decision. As such, managers should develop proper pricing strategies that promote the profitability of an enterprise. It should be noted that a 1% change is price optimization has greater effects on the net profits that can be obtained by a firm. Therefore, various organizations use different pricing models that encompass value-based technique and cost-based approach to attain the intended objectives. This paper evaluates the differences between these two enterprise methods to determine the most appropriate plan.
Notably, cost-based pricing is determined by the amount of money spent by the manufacturer to produce and distribute a particular good in a market. In particular, the operator uses the cost of production as a concept to set the price of the commodity. As such, the producer can determine the lowest and the highest value of the good, thus, calculating the profit margin in all these instances.
Further, the determination of the floor and the ceiling of the prices are essential during increased competitiveness in a given industry. For instance, during a greater rivalry between similar firms, a business may set its prices closer to the floor as a technique of gaining an edge against the challenger. The system majorly allows the production of mass products in which the firm can reach the consumers that prefer inexpensive commodities. The weakness of this technique is depicted in its disregard to market positioning and lower profit margins. Remarkably, textile industries are the known establishments that apply this trading model in different markets.
Conversely, in value-based pricing, a firm evaluates the value of its goods to the consumers as opposed to the amount it incurs during the manufacturing process to set the price of a commodity. This aspect is achieved through the scrutiny of the perception that the item is likely to produce after the acquisition. The major generated items include happiness, stability, reliability, and stress relieve through the use of the material. Majorly, chemical industries apply this model of trading to achieve customer loyalty.
Further, cost-based pricing is implemented to satisfy the current needs of a company and the customer. However, value-based pricing is regarded as a future investment. Nonetheless, the model is not scalable due to higher valuation of goods, thus, fewer customers. Value-based pricing mainly deals with luxury materials while cost-based pricing is used in the determination of normal products that are affordable to the larger population.
As such, cost-based pricing model has a larger consumer base as compared value-based system that is composed of a particular niche of consumers. Further, cost-based valuation is majorly used by smaller companies that strive for competition while the latter approach is implemented by established corporations that consist of a certain number of loyal customers. The implementation of value-based pricing demands an intensive research as compared to cost-based valuation due to its intensive use of customer data and evaluation of competing commodities.
Given these differences, a company should implement the correct pricing strategy without disregarding its customer base and size. A proper model will, therefore, determine the competitive ability of the firm.