The Differences Between Value-Based Pricing & Cost-Based Pricing

The Differences Between Value-Based Pricing & Cost-Based Pricing

A pricing strategy can be a survival tool or a marketing message. Cost-based pricing uses objective considerations such as, how much you spend to manufacture your products and how much the market can reasonably bear. Value-based pricing uses subjective criteria, using your product's intangible qualities to determine how much to charge.

Value-based pricing relies on customers' subjective assessment of a product's worth, while cost-based pricing considers what it cost to produce it and how much customers are willing to pay. Value-based pricing is more common for services and cost-based pricing is more common for physical products.

Relying on Marketing Messages
Both cost-based and value-based pricing strategies rely on marketing messages, but they do so in very different ways. Cost-based pricing considers your price relative to that of your competitors. You may choose to offer a lower price, than using other options to attract cost-conscious customers, or you may opt to charge an amount in the same ballpark so your offerings won't seem overpriced.

Either way, you're looking at your prices in comparison to those of your competitors, and making a choice based on what you believe your customers will accept. Value-based pricing uses retail cost as a way to send a message about quality. Products such as Rolls Royce automobiles and Rolex watches are status symbols, and are regarded by their customers as being worth the additional cost.