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Cost, Value Pricing
The cost based pricing approach is product driven rather than customer driven. Engineering and manufacturing departments design and make what they consider a “good”. They then make investments and incur costs to add features and services. Finance then calculates these costs and adds a mark-up to determine “target” prices. Marketing then steps in at this stage, entrusted with task of “demonstrating” and “hard selling” the value to the customer to justify the prices set. If he prices prove unjustifiable, marketing resorts to price cutting to achieve the sales target, in turn, damaging the profits from the product. What inevitably follows is a tussle between marketing and finance and problem keeps recurring as there is a fundamental mismatch between customer needs and the product created.

Under the value based approach, profit leading companies now think about what market segment they want to serve, determine the benefits the potential customers seek and establish a price that the customer can be convinced to pay. These companies the challenge their engineers to develop products and services that can be produced at a cost low enough to make serving that market segment profitable.

Strategic pricing approach to pricing considers that pricing must follow key decisions on:

(i) The strategic objectives of the firm (profitability and market share)

(ii) Target customers and product positioning

(iii) The competitive position of the company

(iv) The changes in the competitive positions as the product moves through the life cycle

(v) Distribution channel considerations

(vi) Legal environment that the company operates within

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