Advantages and disadvantages of cost based pricing methods

• Cost based pricing models have some benefits and drawbacks

Advantages

• It is easy to understand and calculate the price
• These pricing models make sure that incurred costs are covered
• They can be helpful and do simplify investment appraisal decisions for example using required rate of return
• They are fair and logical
• Can be useful when setting the price of new and innovative products

Disadvantages

• These methods ignore demand and the price elasticity of demand
• Ignores the competitive situation e.g. what competitors are charging
• Does not take advantage of market potential for example if a product is new and innovative such as the iPad was when it was introduced there is potential to charge a high price
• Is inflexible in the face of changes in demand levels
• Costs cannot be measured with precision making them difficult to determine
• Takes into account sunk and unavoidable costs
• Ignores capital requirements and the return on investments
• Can result in under pricing or overpricing
• Removes the motive to become more efficient

To access more topics go to the O Level Business Notes