Roger is trying to figuring out pricing for his new product, a rock that looks like a friendly turtle. He decides to price it 30 percent more than the cost of making it, which is $1. Roger is using what type of pricing strategy?
Explanation
Answer: c - Roger is using cost-plus pricing. In general, we suggest you avoid cost-plus pricing whenever possible in your analysis. Cost-plus pricing typically applies a certain margin on top of production costs to come up with a price.
When possible, use value-based pricing. Value-based pricing requires a more sophisticated analysis than cost-plus pricing to determine what consumers of a good are willing to pay. When it is possible, value-based pricing is a more nuanced analysis and yields improved profits.
Key Takeaway: In the ‘80s, a pet rock craze swept the nation. The cost of making a pet rock was almost zero, yet people’s willingness to pay was high. Cost-plus pricing would have prevented the inventor from maximizing the value of his idea.
