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CAFIFGE, Margarette Nichole Y.

21 March 2020
BS-ENTP 2 Mrs. Ma. Angelita Ramona Valles
MW 1:30 PM – 3:00 PM Pricing and Costing

Explain the following:

1. Cost-based pricing

Cost-based pricing makes use of the cost of procuring, making a product, or rendering a service
and then adding a desired amount (usually referred to as a mark-up). At other times, the cost is still
taken into accounted for and that cost is deducted from the desired revenue to get a desired percent
of the margin or the amount of profit the firm wants to get.

2. Competition-based pricing

Prices of a firm’s products or services are based on research and market study. Firms would sought
out other firms that are directly related to their line of business to check the prices of their products.

3. Customer-based pricing

It is a pricing strategy which considers the customers’ preferences and how they perceive the value
of a firm’s product or service. These three are the summarized steps and tips to do customer-based
pricing:

a. Estimating the Value to the Customer


b. Translating a VTC Estimate Into a Price
c. Identification of the Reference Value
d. Two Approaches to Determining Differentiation Values
e. Importance of Understanding Customer Needs

In estimating the value to the customer, one needs to know what the substitute of your product is.
With that, you have a reference value to your product. You compare the two alternative products
and have a point system for each factors or attribute of the products. That is how the amount the
customers are willing to pay is found.

4. Potential of customer-based pricing

a. When a Product’s Value-to-the-Customer is Lower than Its Reference Value

Especially for start-ups and newly established businesses, their company’s value, together with
their products and services, may be compromised since there may be more known companies
similar to their products. The key to this is to just price the product lower than those company’s
but never price it lower than the actual cost of your own product. For obvious reasons, business
happens so that profit is earned.

b. Using Price to Guide Product Development

Product Development is when a company is on-going the development and experimentations


on its product idea. At this stage, most of the time, the firm requires costing. Usually it will
decide to calculate the cost based on the cost of materials, labor, equipment, energy, other
overhead costs, and other indirect costs. With the customers being considered early on in the
product development, it may be valuable to the form, since obviously, these customers are the
ones who may be buying your product. Considering them with the product will lead to a better
probability on having sales. They will also play the part of being a judge or critic for the
improvement of the product before it goes out to the market.

c. Different Customer Values for Different Market Segments

Knowing your market is very important since there are different kinds of markets. For example,
millennials and centennials value more technological advancements than the boomers, but they
are also a picky market so pricing can differ between these two segments. Raising the price for
millennials and making a better marketing strategy could boost sales. As for boomers, enough
marketing strategy could convince them but still use a high price for them. In other words, there
can be different prices for every single market segment chosen.

d. Customer Needs as the Drivers of Initial Price

There are times that the mere computation of a price using the cost and not its value that we
forget to consider that value has a price in it. This means that we forego profit because we fail
to realize that a product’s value and its differentiating factor with a price. There are products
in which customers value more but that they are not costly made. An example would be milk
tea: In countries outside the Philippines, like Thailand or China, they sell milk tea for Php 30
to Php 50 lesser than the price we impose here. If Filipino milk tea businesses sell in those
countries, they would probably earn more because of how they market the product – its benefits,
its taste, and describing these to be “imported”.