Value-Based Pricing vs. Cost-Plus: Effective Strategies Analysis

This essay examines effective pricing strategies, contrasting value-based pricing with cost-plus approaches. It argues that prices should reflect both consumer willingness to pay and production costs, emphasizing the importance of perceived quality in premium pricing. The essay discusses various strategies, including premium pricing, market penetration, economy pricing, and price skimming, detailing how businesses can implement them. Furthermore, it explores tactics for managing price wars, categorizing responses into non-price actions like quality branding and strategic partnerships, and price actions such as discounts and new product introductions. The analysis draws upon academic research to support its arguments, providing a comprehensive overview of strategic pricing in competitive markets. Desklib provides a platform for students to access similar solved assignments and past papers.

Running head: EFFECTIVE PRICING STRATEGIES 1
Effective Pricing Strategies
Student’s Name
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EFFECTIVE PRICING STRATEGIES 2
Do you believe that prices should reflect the value that consumers are willing to pay or
should price primarily reflect cost in making a product or a service?
Prices should reflect the value the consumers are willing to pay which can be viewed as
demand and the cost of input involved in the final product or service. It is the goal for every
business to make a profit at the end of every product or service as their gain. In this case, the cost
of selling the product or service should exceed the cost of inputs to achieve profits. In my view,
prices should primarily reflect the quality value to the consumers. It is the supposed quality
which encourages the consumer to offer a first-class price but not the quality guaranteed by the
business (Hamzaoui & Linton, 2010). Customers set the price range in their mind to provide in
exchange for quality services or products. When a company continually, provide to customers
quality products, the firm achieves their loyalty, and this can be a better scope to premium
pricing of the products which can also generate more than the cost plus the markup price.
Increase in the value of the product is an efficient model to charge a value-based price. There is
an assumption the customers that low rates are associated with low quality. Therefore, charging
lower prices than competitors’ calls for suspicion about the quality of the product despite the fact
that the quality is not degraded. For example, IBM uses premium pricing strategy for their
services and products whose prices are motivated by their brand value. In conclusion, I think that
Prices should reflect the amount the consumers are willing to pay and the cost of input involved
in the final product or service (Steenkamp, Van & Geyskens, 2010).
Which pricing strategies do you think is the most effective? How would you apply them?
1. Pricing at a Premium
In premium pricing, the firm sets costs which are higher than the competitors and is based
on value branding. This model is applied especially when the product is new in the market

EFFECTIVE PRICING STRATEGIES 3
associated with selling of unique products. A business can use premium pricing by first creating
value perception of the product to the customers. The method and appearance of packaging
should attract the customer as well as stock interior decoration to support the premium prices
(Steenhuis, Waterlander & De Mul, 2011).
2. Pricing for Market Penetration
The penetration technique is pricing with an aim to attract new buyers by lowering of
prices on goods and services. Companies use this model to swiftly operate with less struggle
in competition field. The penetration strategies can be applied by an upcoming business
where it offers prices to their products slightly lower than their competitors. Over a time, due
to the increase in awareness of the product, profits can be achieved due to demand. in the
long run, after getting into the market, the entity may choose to increase the prices based on
their cost of inputs.
3. Economy Pricing
Economy pricing is a model of product pricing used by a wide range of businesses
with the aim of minimizing the production as well as marketing costs thus attracting price-
conscious customers. Economy pricing can be applied by discount retailers or food suppliers
who have a sales volume by giving discounts on products or maintain low prices to
encourage more customers.
4. Price Skimming
Price skimming enables firms to maximize sales on new products in the market. This is
achieved by setting high prices on the product in its early phase in the market then lowering the
prices gradually as competition sets in the market. Skimming prices can be applied by starting

EFFECTIVE PRICING STRATEGIES 4
companies which generates development costs and also increases an impression of quality to the
consumers (Martínez-de-Albéniz & Talluri, 2011).
How would you handle a price war?
Ways on fighting price wars can be categorized into non-price responses and price responses.
Non-price responses
Revealing strategic purposes and abilities: Strategies to be initiated are such as offering to
match the competitor's price or low prices on products as well as showing the cost advantage
(Sotgiu & Gielens, 2015).
Quality branding: A company can achieve this by increasing differentiation in products
appearance. Adding features to a product which can attract customers purchase as well as create
awareness of the existing features along with their benefits. The company should also emphasize
the performance perils in low priced selections.
Cooperating with contributors: A company experiencing war on prices should form a
strategic partnership by offering commercial and exclusive deals with various retailers, suppliers,
brokers or other active providers of related services.
Price responses
With price responses, the firm is required to use intricate price actions. This can be
achieved by offering discounts, promotions of prices, by use of two-part pricing and loyalty
programs for the goods. A company can also introduce new products which can be achieved by
introducing neighboring varieties that strives in customers sector being defined by competitors.

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A company should also initiate simple price actions such as adjusting the prices to correspond to
that of competitors or a new company in the market (Van Heerde, Gijsbrechts & Pauwels, 2015).

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References
Blank, S. (2013). The four steps to the epiphany: successful strategies for products that win.
BookBaby.
Hamzaoui Essoussi, L., & Linton, J. D. (2010). New or recycled products: how much are
consumers willing to pay?. Journal of Consumer Marketing, 27(5), 458-468.
Martínez-de-Albéniz, V., & Talluri, K. (2011). Dynamic price competition with fixed
capacities. Management Science, 57(6), 1078-1093.
Sotgiu, F., & Gielens, K. (2015). Suppliers Caught in Supermarket Price Wars: Victims or
Victors? Insights from a Dutch Price War. Journal of Marketing Research, 52(6), 784-
800.
Steenhuis, I. H., Waterlander, W. E., & De Mul, A. (2011). Consumer food choices: the role of
price and pricing strategies. Public health nutrition, 14(12), 2220-2226.
Steenkamp, J. B. E., Van Heerde, H. J., & Geyskens, I. (2010). What makes consumers willing
to pay a price premium for national brands over private labels?. Journal of Marketing
Research, 47(6), 1011-1024.
Van Heerde, H. J., Gijsbrechts, E., & Pauwels, K. (2015). Fanning the flames? How media
coverage of a price war affects retailers, consumers, and investors. Journal of Marketing
Research, 52(5), 674-693.