GTM360 Blog

Official Blog of GTM360 Marketing Solutions

Marketers are familiar with cost-plus and value-based as two most frequently used pricing models for products and services.  Under cost-plus pricing, all input costs are totalled up and a markup is applied on top to arrive at the selling price. On the other hand, value-based pricing sets the selling price based on brand, competitor prices, perceived value of pain solved or gain created, and many other factors that are not linked to input costs.

Any given item in the market will have a price that is either based on cost-plus or value-based pricing models. This makes a direct comparison of the two prices impossible. However, most people intuitively know that value-based prices are often much higher than costs. The following price of a full English breakfast in a typical London five star hotel confirms this intuition beyond any doubt.

feb02 300x117 The Tug of War Between Different Pricing Models

This example has been taken from Hotel Babylon, a book written by Imogen Edwards-Jones and Anonymous about the luxury hotel industry in London.

At the same time, most people – including us – tend to believe that cost-plus and value-based prices for a given brand will bedirectionally identical. In other words, for two products A and B from the same manufacturer, if it costs more to produce B, we’d be inclined to believe that B should have a higher selling price than A, no matter whether the manufacturer used the cost-plus or value-based pricing model.

We recently came across an example which went counter to this notion.

Panasonic recently launched a new model of desk phone called KX-TSC62SX. Readers would be aware that feature-rich handsets generally need batteries and a charger to charge the batteries, as a result of which they need to be plugged in to the mains at all times. Unlike its older brethren, the KX-TSC62SX doesn’t use any batteries.

panasonic04 300x183 The Tug of War Between Different Pricing Models

No batteries means no charger, therefore KX-TSC62SX has a lighter bill of material and a lower cost as compared to previous models of Panasonic phones that require batteries. At the same time, lack of batteries means no need to plug a KX-TSC62SX to the mains. As a result, KX-TSC62SX alleviates the pains inherent with conventional phones of having to cart around one more wire and be tethered to a power socket.

Therefore, cost-plus pricing dictates a lower selling price, whereas value-based pricing justifies a higher selling price, for the same product. There’s the tug-of-wars between different pricing models.

RELATED POSTS:

  1. “Perceived Cost Plus” as a New Pricing Mechanism
  2. Price Decontrol Doesn’t Mean Inflation
Ketharaman Swaminathan On November - 25 - 2011

Categories

IT Marketing, Uncategorized

Tags

Related Posts

  • No related posts found
  • Do you people have a facebook fan page? I searched for one on facebook or twitter but could not discover one, I’d really like to become a fan!

  • Hey, I can’t view your site properly within Opera, I actually hope you look into fixing this.

    • Ketharaman Swaminathan

      Thank you for the feedback. We’ll take this up with our theme provider. Hopefully, it will be resolved soon.

  • Great post, I admire the writing style 🙂 A little off topic here but what theme are you using? Looks pretty cool.

    • Ketharaman Swaminathan

      Thanks. It’s called Quest.

  • Facebook
  • Linkedin
  • RSS
  • Twitter
  • Youtube
  • See our Pinboard
Enter the video embed code here. Remember to change the size to 300 x 250 in the embed code.

Sponsors

  • GTM360 - Marketing for Midsize IT Companies
  • EMAIL360 Website Lead Generation Widget
  • SAP Mailing List
  • QR360 - Beyond Quick Response Codes


Switch to our mobile site

Enter your email to sign up for GTM360 Blog: