Competition-based pricing

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 .

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 .

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 .

Advantages and disadvantages of Competition-based pricing

Advantages of Competition-based pricing:

• being intuitive
• being relatively easy to carry out

Disadvantages of Competition-based pricing:

• 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:

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

Examples of Competition-based pricing

• Price Matching: Price matching is a strategy used by companies to compete with rival businesses by matching their prices. Companies will set a price for their product that matches the price of a competitor's product. This allows the company to maintain their market share and remain competitive.
• Price Skimming: Price skimming is a pricing strategy in which a product is initially offered at a high price and then gradually lowered over time. This pricing strategy is effective in capturing consumers who are willing to pay a premium price for a product and in generating a quick return on investment.
• Penetration Pricing: Penetration pricing is a pricing strategy where a company sets a low price for a product or service to quickly attract customers and increase market share. This strategy can be effective for companies that are just entering the market and need to quickly build their customer base.
• Loss Leader Pricing: Loss leader pricing is a pricing strategy where a company offers a product or service at a low price to attract customers and generate sales. The goal of this strategy is to make money from other products and services sold to the customer, rather than from the product itself.

Other approaches related to Competition-based pricing

Competition-based pricing is a method of determining the appropriate price level concerning the competing companies. Other closely related pricing approaches include:

• Cost-plus pricing - in this approach, the price of a product is determined by adding a markup to the cost of producing it.
• Market-oriented pricing - this approach takes into account the demand for the product, the customer's willingness to pay, and any potential competition.
• Psychological pricing - this approach prices products based on psychological factors, such as the customer's perception of the product's value.
• Value-based pricing - this approach takes into account the perceived value of a product rather than its cost.

In conclusion, competition-based pricing is just one of the many pricing strategies that companies can use to maximize their profits. Other closely related pricing strategies include cost-plus pricing, market-oriented pricing, psychological pricing, and value-based pricing.

Competition-based pricing — recommended articles

Pricing strategy — Cost oriented pricing — Competitive parity — Price-Taker — Product line pricing — Market based price — Range of products — Price taker — Competitive Pricing

References

• L. Conkling R. (2011), Energy Pricing: Economics and Principles Springer Science & Business Media
• M. Pride W., O. C. Ferrell (2012), Foundations of Marketing Cengage Learning
• M. Schindler R., Schindler R. (professor.) (2012), Pricing Strategies: A Marketing Approach SAGE
• Rajagopal (2013), Marketing Decision Making and the Management of Pricing: Successful Business Tools Idea Group Inc (IGI)

Footnotes

Author: Klaudia Wojtas