Essay Sample on the Differences Between Value-Based Pricing and Cost-Based Pricing

Value-based pricing is also referred to as optimized value pricing. This is the strategy in pricing whereby the price of a given product or service is set based on what the firm perceives or estimates to be the value of that product or service to the target customer. This pricing strategy is arrived at by identifying an alternative product to the customer also called "second best option," find out the selling price of that alternative product, identify the strengths of your product and that of the second option product, determine the differences in strength between the two products and calculate the value of those differences in strength to the customers. On the other hand, cost-based pricing is the easiest strategy of determining the price of a product or service as it bases only on the costs of acquiring that product or service plus a certain percentage of markup. There are two types of costs considered in the pricing of the product. The first costs are fixed costs like rent, and then there are variable costs like transport. All these two types of costs are factored into in arriving at the selling price of a product or service (Huang, R., & Sarigollu, E., 2014).

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These two strategies of pricing have got several advantages and disadvantages when applied by a firm.

Advantages of Value-Based Pricing.

Profit maximization

Value-based pricing strategy helps a firm in maximizing it profits as the product may be valued at a very high price as compared to the production costs. This means a firm can realize huge profits on a product as compared to price is based on the cost of production.

Value for money to a customer

Value-based pricing is a strategy that best resonates with customers. Customers pay because of the value of the product and not the cost you incurred in producing that product. It, therefore, values the customer feelings (Kim, J. H., & Hyun, Y. J., 2011).

Disadvantages of Value-Based Pricing

Niche Market

Value-based pricing strategy may lead to the setting up of a price that is out of reach for the majority of the potential customers. This may lead to those customers opting for an alternative product that is affordable to them.

Customer perception

This pricing strategy is very challenging to calculate as it is very hard to determine and calculate the real value of a customer's perception.

Advantages of Cost-Based Pricing Strategy

Simplicity

It is the simplest way of arriving at the selling price of a product as the costs of the firm are well known.

Logical in accounting for production costs

Production costs must be recovered at one stage of accounting, and this strategy best helps in accounting for the costs incurred in producing the product.

Disadvantages of Cost-Based Accounting

Ignores economics theory

A product should be priced factoring in the demand of that product price being elastic to demand.

Ignores competition

The price of a product should also relate to what the competitors are charging so that its price does not push it out of the market.

My project company is Coca-Cola Company. This is a beverages company with the highest portfolio of products boasting of over 3300 beverage products. The company uses several pricing strategies to set up the prices of its products. These include Market Pricing whereby they set the price according to the market trends thus putting at not too low and too high to the market. Other strategies that Coca-Cola applies include Segmented Pricing, Psychological Pricing, and Promotional Pricing strategies. This is the best method of pricing its products because it maximizes the profits of the company while keeping its products competitive in the market as it is affordable to the majority (Mintz, O., & Currim, I. S., 2013).

Price skimming strategy for Coca-Cola products can be the best way of boosting its sales. Coca Cola's products are huge international brands and therefore a slight reduction in prices over time will lead to a surge in sales and may even force its competitors out of the market. Penetrating strategy may not work for Coca-Cola Company as most of its products have penetrated to most of the markets as compared to the competitor's products.

Distribution

Vertical Marketing v Horizontal Marketing about Coca-Cola products

Vertical Marketing is the kind of strategy where product production and marketing is solely focused on a certain niche or group in the society. This kind of marketing strategy is meant for products that are exclusive for use or consumption by a certain group of people. Horizontal Marketing, on the other hand, is the type of marketing where the target is the general consumers, and therefore it is not discriminative. It is meant for products and services that are fast moving. For the case of Coca-Cola, therefore, the best marketing strategy to apply is Horizontal Marketing as its products are sold to the masses without discrimination and are fast moving (Leonidou, C. N., Katsikeas, C. S., & Morgan, N. A., 2013).

Marketing channels describes the process by which goods are made available to the consumer from the manufacturer. Coca-Company uses Franchising method to market and distributes its products. Using this method, Coca-Cola only produces syrup concentrate and distributes that syrup concentrate to the bottlers who then mix it with other ingredients like water and sugar for a ready product to be sold to the consumers. The Franchisee uses the trade name, marks and brands of Coca-Cola to produce the products and sell it. This method is the best strategy for Coke Company because of its several merits. One of the strengths of Franchise channel of marketing and distribution is that it provides the opportunity for the company to expand its capital as the franchisees will provide their capital. Secondly, the company is in position to cut down on its overhead costs and labor-related issues when it embraces Franchising as the distribution. Finally, franchising model plays into Coca-Cola strategy of penetrating the market as it leads to expansion of the market. However, franchising has its weaknesses as it is very costly regarding training as all the people working at the franchisees need to be trained on the production and sale of that product. It is also time-consuming to set up a franchising business model (Sagala, C., Destriani, M., Putri, U. K., & Kumar, S., 2014).

Promotion

Promotion mix is one of the 4Ps of marketing strategy that Coca-Cola employs in maximizing its sales and revenue. There are five types of promotions that a company can employ in selling its products which are Advertising, Personal Selling, Direct Marketing, Sales Promotions and Public Relations.

Advertising

Coca-is the biggest spender of money on advertising in the world. Coca-Cola employs different strategies to advertise its products. The advertisements of Coke products are always funny and appealing to the audience. Most of its advertisements are also conducted by respected celebrities in the country of the target audience. The advertisements in print and broadcast media have helped a great deal in boosting the sales of its products.

Direct Marketing

Coca-Cola has also used direct marketing in to help boost the penetration levels of its products. Coca-Cola has been made aware of the power of the internet in the modern times. Many people now access the internet courtesy of advancement in technology. Coke has ensured that the awareness of its product on social media is enhanced thus the increase in sponsored marketing messages on Facebook, Youtube marketing Coke products.

Sales Promotions

Coca-Cola also uses sales promotion marketing strategy to market its products. It organizes winning promotions for its customers in different market segments where the aim is to increase its sales of the existing product on promotion and also to try and win back the customers that had opted for an alternative product.

Public Relations

Public relations also play a vital role in marketing the products of Coke. Coca-Cola has a professional public relations team that responds promptly to the consumer needs and complaints. By investing in an effective public relations team, it ensures that the image of the firm to the corporate world remains good and reputable to make the selling of its products to be easier (Oladepo, O. I., & Abimbola, O. S., 2015).

Personal Selling

The last promotion strategy that Coke employs to boost the sales of its products is personal selling. There are moments when Coke, through its franchisees, hires young men and women to sell its brands directly to the market. This is meant to have a one-on-one interaction between the firm and the consumer. This strategy works for them because any feedback received from the consumers is acted on to bring the best experience between the firm and the consumer.

Leveraged sales approach is a good strategy that can be used to complement the existing marketing strategies. Leveraged sales are an approach to increasing the company's sales without affecting the profits. The Coke company should employ this strategy because customers have changed, the economy has changed, the marketplace and tools have changed, and technology has also changed. The company should, therefore, sales leverage to boost its sales to the market.

Building the PR of a product first before advertising it is the most critical marketing part in sustaining the competitiveness of a product on the market for long periods. As Jonah Berger rightly puts it, "If companies do not focus on their customer needs, someone else will. While advertising focuses on marketing the product only, PR focuses on the value of the product on the market. Therefore, unless the product is valued by consumers, the advertisement will not change its perception to the market. The marketing strategy, therefore, should focus on market value (Nour, M. I., & Almahirah, M. S., 2014).

Global Market Place As Asserted By Levitt.

The world's needs and desires have been irrevocably homogenized making multinational corporation obsolete and global corporation absolute.

In the case of Coke products, this statement is true because Coke is a global company that has a single brand and image that resonates well with the global consumers. Even the marketing strategy and message is same throughout the world. This has boosted its sales as the Coke brand is valued across the world unlike when they could have been using different brand names for different markets.

Technology drives consumers towards alleviating world's problems and expanding discretionary time and spending power.

This assertion is also true because the spending power of consumers of coke products has increased with advancement in technology. It has also alleviated world's problems like disease and poverty.

Cultural preferences lose relevance to economic decision making or diffuse to other groups.

This might be untrue as the coke product has been a cultural preference of consumers for centuries. It has retained its cultural identity, and still, it is preferred by consumers despite the changing economic times.

The main globalization challenge that Coca-Cola company has is the fact that more and more people are reducing the intake of sugar in their bodies. Because several of Coke's products contain different levels of sugar, the consumers who do not take sugar for medical reasons may opt out of Coke products. Coke company should, therefore, be innovative in diversifying its products on the market to satisfy the lifestyle challenges of its consumers (Neha, S., & Manoj, V., 2013).

References

Huang, R., & Sarigollu, E. (2014). How brand awareness relates to the market outcome, brand equity, and the marketing mix. In Fashion Branding and Consumer Behaviors (pp. 113-132). Springer, New York, NY.