This pricing method is great for items that have a high perceived value to the customer and that are difficult for the customer to produce themselves or find at a discount. The thinking in this model is not to start with COGS and add on other amounts, but to start with what your competitors are charging and then either raise or lower your price based on the additional value you provide, how you want the customer to think about your product, and how you present/market the product.
Examples:
1. If you want to be seen as a premium product you may spend a little more on marketing or packaging and give the impression that your product is better than you competitors. People expect to pay more for premium products so if you can convince the customer yours is better you can charge more. This will appeal more to clients who buy based on brand or prestige and who want to be seen by others as using the best.
2. If you want customers to think of your product as sensible (instead of prestigious) you can spend less on packaging & marketing and appeal to the idea that you are just as good as the expensive products but are also affordable so the customer gets to save money. This will appeal to price driven customers and customers that don't know much about the product but want or need to try it.