What are the advantages of using incremental costs instead of full costs for pricing? Are there any negative implications of using incremental costs that a pricing strategist needs to be aware of?
What will be an ideal response?
Prices based on incremental costs assist in enlarging the total market. This is because incremental costs reflect real costs, which are lower than historical total costs. Such a pricing perspective provides the leverage for a company to compete aggressively pricewise and realize experience.
However, basing prices on incremental costs may lead a company to charges of price discrimination if the matter is not handled within the legal constraints. Additionally, incremental costs cannot be used as a basis for pricing a product that involves high fixed costs and is still in the introduction stage of its life cycle.
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