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.

 

Required:

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.

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?

Product cost is sometimes used as a base pricing there could be many reasons behind this. The biggest reason is that companies does not have data about customer value perceptions. The other reason is about where companies unable to compete on profitable price they have to set a price based on the cost of product at which they are producing.

Four reasons:

If a company is lowest cost producer of a particular good or service then cost based pricing is profitable where other producers unable to meet that price. Being as low cost producer, ignores the data difficulty in estimating customer value and, therefore, demand at different prices.

Cost based pricing can ignore contracts and regulations by a government, a cost based pricing can have a highest price or lowest price which may ignore a price which has been set by government for that particular product.

There will be no long-run customer goodwill because it ignores consumer values. Cost based pricing does not consider consumer value and perceptions. which in turns lead to lost consumer confidence in company products over a long run.

Cost based pricing discourage the competition, as price of a product could be very high, which would cost the organization as far as lost deals and piece of the pie. The estimating could likewise be lower than the competition's, making the organization lose potential benefits in light of not charging the market rate for its products. 

Step-by-step explanation

Hope this helps.

Let me know if you have any questions related to this in comment section.