What are the problems associated with the use of a cost-based pricing strategy? What contribution does cost make to the setting of prices?
What will be an ideal response?
Setting prices based solely on costs ignores demand and other important factors such as marketing mix components or consumer needs and wants. Prices determined strictly on the basis of cost may be too high for the target market, thereby reducing or eliminating sales. Cost-based prices may also be too low, causing the firm to earn a lower return than it should. Costs play an important role in price setting, however. Costs serve as floor below which a good or service must not be priced in the long run.
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