Competition-based pricing

Competition-based pricing
See also


Competition-based pricing is a method of determining the appropriate price level concerning the competing companies. The importance of this method increases when competing merchandises are approximately homogeneous and the organization is serving markets in which price is a principal purchase consideration. A company that uses competition-based pricing may choose to price below competitors' prices, above competitors' prices, or at a similar level [1].

The essence of Pricing

Pricing is a critical task to maximize the profit of business organizations. Price is the one element of the marketing mix that generates revenue while the rest are costs. Most companies intend to increase prices to increase the short-term profits. Prices that undercut competitors attract new customers and allow for more comprehensive utilization of facilities. However, low prices squeeze margins and usually reduce net profits. The selection of pricing objectives is determined by the declarations of business positioning. Maximizing the revenue, maximizing the market share, and achieving quality leadership might be one of the objectives of the pricing strategy for a growing company [2].

Complexities of Competition-based pricing

A competition-based method of setting a product's initial price could deal with complexity by concentrating on only the highest marketplace prices, on only the lowest, or on only prices in the middle of the competitive price range. Alternatively, attention could be focused on the prices of one particular competitor, conceivably the one that is largest, the one registering the fastest growth, the one that is most prestigious, or the one considered most similar to the company that is setting an initial price. In business markets, a further difficulty of competition-based pricing involves determining competitors' original prices. In many business markets, prices are not publicly posted either because they are determined by a bidding process or because they are determined by individual negotiations between the purchaser and seller. Sometimes the publicly available posted prices are not the prices at which commodities are actually sold because of subsequent private discounts or negotiations. The reports from salespeople concerning what customers have told them about the prices of their competitors might be able to be drawn on by a seller in such situations. In most examples, useful estimates of competitors' prices would require supplementing such information from customers witch information about competitors' likely costs, strategies, profit levels, and other elements of competitive intelligence [3].

Advantages and disadvantages of Competition-based pricing

Advantages of Competition-based pricing[4]:

  • being intuitive
  • being relatively easy to carry out

Disadvantages of Competition-based pricing[5]:

  • producing prices that may not be helpful to efforts toward maximizing total profits
  • if the seller's competitors set prices by looking to their competitors, the seller might wonder how long this has been going on

Other pricing method

Other pricing method, that are used in financial management[6]:

  • Cost-based pricing
  • Demand-based pricing
  • New-product pricing
  • Product-line pricing
  • Professional pricing

References

Footnotes

  1. W. M. Pride, O. C. Ferrell 2012, p.372
  2. Rajagopal 2013, p.9
  3. R. M. Schindler, R. Schindler (professor.) 2011, p. 29
  4. R. M. Schindler, R. Schindler (professor.) 2011, p. 29
  5. R. M. Schindler, R. Schindler (professor.) 2011, p. 29
  6. W. M. Pride, O. C. Ferrell 2012, p. 371-381

Author: Klaudia Wojtas