Pricing Strategy - Difference

Hi Brinja,

please find my answer below:

1. When applying a competitor-based approach, the main question is: „How much do customers pay for comparable products of competitors or substitutes?“
   • You base your prices on the costs for comparable products produced by competitors. If no comparable product is available (e.g. as it is the case with the anti-smoking pill), you would investigate the pricing of substitutes (in this e.g. case anti-smoking patches).
   • Your reasoning here is that your product is of equal value to the customer as are those of competitors and the customers is likely to switch to a different product if there is a huge price difference (it is not really that different if you take a pill each day or put on an anti-smoking patch, is it?). Of course you would need to take into consideration customers’ total spend (e.g. it takes 30 days to quit smoking if you use anti-smoking patches, and only 15 days when using pills)
2. When applying a value-based approach, you approach the issue from the customer-side: "How much would the customer would be willing to pay for my product?" If your anti-smoking pill has a much stronger effect than an anti-smoking patch has when it comes to the rate of relapse (e.g. you are a bit more likely to quit smoking for ever than when using an anti-smoking patch), customers are very likely to pay a higher price for your product. Here, your product is of higher value than are those of competitors. A typical example for applying the value-based approach is the iPhone - from a performance perspective, iPhones are not that different from Samsung phones, however, the iPhone is often bought because people think it is cooler than a Samsung (this is its unique value).
3. For the cost-based approach, the question is: "How much does my product cost in production and what margin do I want to apply?" You would consider all costs that occur during production and apply a margin. Here it is important, that you want to make sure that you 1. cover all your costs and 2. ensure that you earn something on top. You may choose whether you allocate your R&D costs to the cost-base or whether you cover them using your margin and accordingly apply a higher margin. In reality, this approach is used very rarely because it is rather theoretical and neither takes into account the competitor nor the customer perspective.

Hope this helps!