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Why is the product cost sometimes used as a base for pricing

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Reference no: EM132587711

Cost-Based Pricing

  • The financial benefits of estimating customer value and the corresponding demand with different prices, and then choosing prices to maximize organizational value, appear obvious. Yet, many businesses use only costs to make pricing decisions. Studies reported that firms viewed cost information as an important factor in pricing decisions, especially in intensely competitive markets.
  • However, setting prices based on the product cost without consideration of customer value and demand could put businesses at a competitive disadvantage. An analysis of both product costs and the demand for products at different prices is necessary to maximize profit. The following reasons are often given for pricing based only on product costs: (1) difficulty in estimating customer value and, therefore, demand at different prices; (2) contracts and regulations; (3) long-run customer goodwill; and (4) discouraging competition.

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Question 1: Why is the product cost sometimes used as a base for pricing? Discuss the four reasons for pricing based only on product cost as mentioned above.

Reference no: EM132587711

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