Market based Pricing, Competitor based Pricing
Market based Pricing
Market-based pricing is the act of setting prices that are closely aligned with the current market prices of similar products. If a business creates products that are differentiated from those of the competition, then there may be room to set prices somewhat higher than market rates, depending on how customers perceive the value of the incremental differences offered by the company. Conversely, if a company’s products have a low-quality or commoditized reputation with customers, then it may be necessary to set price points somewhat lower than the market rate in order to sell a reasonable quantity of goods. A smart product design will specifically include high-value features, in order to maximize the price that can be charged.
The market may be willing to pay a higher price when goods are first introduced, and a lower price later, when competing goods reach the market or the product is considered to be late in its life cycle. If this is the case, a business could set its prices higher at the introduction of the product, and eventually drop its price points or offer discounts later, as market interest declines.
Competitor based Pricing
Competition-based pricing is a pricing method that makes use of competitors’ prices for the same or similar product as basis in setting a price.
This pricing method focuses on information from the market rather than production costs (cost-plus pricing) and product’s perceived value (value-based pricing).
The price of competing products is used a benchmark. The business may sell its product at a price above or below such benchmark. Setting a price above the benchmark will result in higher profit per unit but might result in less units sold as customers would prefer products with lower prices.
On the other hand, setting a price below the benchmark might result in more units sold but will cause less profit per unit.
In a perfectly competitive market, sellers almost have no control over prices. It is solely determined by the supply and demand, and products are sold at the market price or going rate.
Advantages and Disadvantages of Competition-Based Pricing
One of the advantages of competition-based pricing is that no complex computations are required. Sellers simply follow a market price, or a price set by market leaders. Also, in a highly competitive market, the burden of price-based marketing is lifted. However, other forms or marketing efforts might be needed.
When sellers adopt the same price as those charged by competitors, certain marketing efforts must be made to attract sales since price is not a major factor; it is neither an advantage nor a disadvantage. Additional efforts include aggressive advertising, better customer support, market saturation, etc.