If the incremental cost begins to exceed the incremental revenue, it is a clear sign to quit producing. Incremental cost is the cost of producing each additional unit. For example, calculating incremental costs and identifying avoidable costs are valuable tasks. For a global corporation, determining costs is a great deal more complex. If you are building a picnic table, it is fairly easy to add up your receipts and calculate costs. Kellogg establishes the price for cereal. Weyerhauser determines the price for lumber. There are also instances when a competitor, especially a market leader, dictates the price for everyone else. The cost of eating out is compared to the cost of groceries. For instance, we may use the price of a vacation as a basis for buying vacation clothes. However, there are also indirect competitors that consumers may use to base price comparisons. We have already discussed the notion of pricing above, below, and at the same level of these direct competitors. Of course there are like-category competitors such as Toyota and Nissan. As noted in earlier chapters, defining competition is not always easy. How much do you expect to pay for a large pizza? Color TV? DVD? Newspaper? Swimming pool? These expectations create a phenomenon called 'sticker shock' as exhibited by gasoline, automobiles, and ATM fees.Ī second factor influencing value-based pricing is competitors. Finally, the marketer must assess the customers' price expectations. Moreover, their knowledge of comparable prices within a product category - e.g. Have you ever watched the television program 'The Price is Right'? If you have, you know that most consumers have poor price knowledge.

How important is price? When is it considered? How is it used? Another factor is the cost of switching. For example, it is critical to understand the customer buying process. Many customer-related factors are important in value-based pricing. The second question is influenced by two more: costs and constraints. It asks and answers two questions : (a) what is the highest price I can charge and still make the sale? and (b) am I willing to sell at that price? The first question must take two primary factors into account: customers and competitors. Still, value-based pricing is not altruistic. Price represents everything about the product.

Price is the easiest marketing tool to copy.To the customer, price is the only unpleasant part of buying.Moreover, it acknowledges several marketing/price truths: Marketers who employ value-based pricing might use the following definition: 'It is what you think your product is worth to that customer at that time'. If we consider the three approaches to setting price, cost-based is focused entirely on the perspective of the company with very little concern for the customer demand-based is focused on the customer, but only as a predictor of sales and value-based pricing focuses entirely on the customer as a determinant of the total price/value package.

Value based pricing approach