ZIMSEC O Level Business Studies Notes: Marketing: Advantages and disadvantages of cost based pricing methods

  • Cost based pricing models have some benefits and drawbacks


  • 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


  • 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

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