Differences between value-based pricing and cost-based pricing are-
Advantages and Disadvantages of Value-based Pricing
Advantages
- Increases profits: This method results in the highest possible price that you can charge, and so maximizes profits.
- Customer loyalty: Despite the high prices charged, you can achieve extremely high customer loyalty for repeat business and referrals, but only if the service or product provided justifies the high price.
Disadvantages
- Niche market: The very high prices to be expected under this method will only be acceptable to a small number of customers.
- Not scalable
- Competition: Any company that persistently engages in value-based pricing is leaving a great deal of room for competitors to offer lower prices and take away their market share.
- Labor costs
Advantages and Disadvantages of Cost-based Pricing
Advantages
- Simple: It is quite easy to derive a product price using this method
- Assured contract profits
- Justifiable
Disadvantages
- Ignores competition
- Product cost overruns
- Contract cost overruns
- Ignores replacement costs
