What is a significant weakness of cost-based pricing?

Cost-based pricing focuses on calculating the costs associated with producing a product and then adding a markup to ensure profitability. A significant weakness of this approach is that it can lead to suboptimal pricing. This occurs because cost-based pricing does not take into account the perceived value of the product to the customer or the competitive landscape. If a company sets prices solely based on costs, it may end up charging too much or too little, resulting in lost sales or reduced profits. For example, if the costs are high but customers perceive the product as having low value, this could lead to lower demand at the established price. Therefore, while cost-based pricing provides a straightforward method for pricing products, it can fail to accurately reflect market conditions and customer willingness to pay, ultimately impacting a company's profitability and market position.