What is market-based pricing?

What is market-based pricing?

10/27/2022 - Pricing strategy

A market pricing strategy, also known as competition-based or market-oriented pricing, involves setting prices based on those that already exist in the market for similar products. Market pricing happens when competitors’ prices influence a brand or retailer when setting their prices, thus affecting demand. The strategy’s main challenge is setting the right prices based on in-depth information about competitors. We explain the advantages and disadvantages of market pricing. 

What is a market-based pricing strategy based on? 

The main factor to consider is the competition. Before embarking on a market pricing strategy, you should know your competitors’ prices throughout the year, and the offer or discount campaigns they launch to increase their sales volume. To make pricing efficient and boost your profits, you must take into account the following: 

  • Your production costs. 
  • Your business expenses, from administrative costs to personnel wage costs. 
  • The level of demand and how it is affected by price changes — whether it becomes more or less elastic. 
  • Your products’ lifecycles, which will determine users’ need to purchase new products. 

Analysing all these factors will help you find the most appropriate market price. Based on this, and depending on your objectives, you can choose to have prices the same as, or very similar to, your competitors, especially when targeting a large population sector. Alternatively, you could set lower prices to attract more price-sensitive consumers or higher prices to portray a perception of higher-quality products and services. 

market-based pricing

Pros and cons of market pricing 

The main advantage of a market-based pricing strategy is that it is easy to implement, especially for newly launched e-commerce businesses. Similarly, it is a low-risk strategy since you know that customers are used to similar prices to yours and they will not reject these prices. That’s why market pricing helps increase revenue faster. 

Among the disadvantages, one should mention that setting market prices can affect the company’s brand image. For example, if prices are low, the brand could be seen as a low-quality store. At the same time, this type of pricing strategy neglects aspects essential to the consumer, such as price sensitivity or a product’s perceived value. It focuses exclusively on competitors positioning and trying to beat them. Finally, constantly reviewing the store’s profitability is necessary, to avoid losses if prices fall too low. To avoid this, you can implement penetration pricing: low prices for the market launch that progressively increase until reaching an optimum point. 

Combine strategies and change your prices in line with the market 

Since all pricing strategies have their pros and cons, you can combine strategies depending on the context and market conditions. You can apply different prices to different product groups. You can also design and launch discount campaigns with lower prices at certain times of the year. Alternatively, you can simply make minor price changes that adapt to changes in supply and demand and remain profitable. You can do this with automated dynamic pricing tools with self-learning capabilities that analyse the environment and recommend the most appropriate pricing at any time. 

Category: Pricing strategy

Tags: competition, ecommerce, pricing

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Angela de la Vieja
Content Manager

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