Market based price
| Market based price |
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Market based price is used to describe price set on the basis of other competitive prices of similar products or services. Market based price is used as a benchmark during preparation of marketing strategy, marketing mix activities and R&D processes during new product development. Market based prices are also reference used to set optimal production and distribution costs of new product and to evaluate break-even point on new products sales volume.
Price is one of the basic elements of the four P's of marketing, which include price, promotion, place and product. When determining the national price, the choice should not be made in a random way. Research should be conducted in many areas, among others on the customer market, competition or product life cycle.
Pricing strategies
Strategic determination of the market price requires stronger relations between marketing and other sectors in the company. In order to improve results, prices should be defined on the basis of internal capabilities and systematic monitoring of customer needs.
Value-oriented
The company should reflect changes in prices over time and differences or changes in the value of the product.
Proactive
The company should anticipate threats such as - competition threats, technological changes and try to neutralize them.
Source of the profit
The company should evaluate the success in price management, comparing the profits with the revenues obtained by the competition.
Price decisions made by management are one of the most important decisions, which affects profitability and competitiveness on the market. They need to understand how customers perceive prices and how they can develop value. The goal is to make the most favorable price that will generate more value for customers without increasing the sales volume of the company. The pricing strategy is based on the market and objective assumptions. The company assesses competitors' products from the same industry or similar. It takes into account the difference between products. If the product has more features, the company may decide on a higher price.
Product price and demand
With higher demand, the company can offer a higher price for the product. When demand drops, it can offer discounts to maintain customers' interest. The demand for the product is also related to the product's life cycle. The product has a specific life cycle, so market prices at the beginning will be higher than at the end of the product life cycle.
Price Sensitivity
When determining the market price, it is important to analyze the sensitivity of potential customers of the product. If they are sensitive to the price, it is worth pricing the product below the price of the competition, this may be beneficial for the company. When consumers have less sensitivity to price, the benefits of the product can be demonstrated. They have less sensitivity when the product or service is luxurious or high quality.
Examples of Market based price
- A company selling mobile phones sets its prices based on the prices of competitors selling similar models in the market.
- A restaurant sets its menu prices based on prices of similar restaurants in the same area.
- A manufacturer of computer components sets the price of its products based on the pricing of other manufacturers of similar products.
- A retailer sets the price of the clothes it sells based on the prices of other retailers in the same city.
- An online store sets the price of its products based on the prices of competitors selling similar items online.
Advantages of Market based price
Market based pricing offers a number of advantages that can help businesses to optimize their profits and remain competitive. These advantages include:
- It helps to maximize profits by allowing for accurate pricing of products and services. By making use of competitive prices in the market, businesses can set prices that are higher than their competitors, but still attract customers because of their competitive advantages.
- It provides a way to evaluate the costs and benefits of new products and services. By comparing the prices of similar products and services, businesses can determine the optimal production and distribution costs to ensure they are achieving the highest profit margins.
- Market based pricing provides a benchmark that businesses can use to assess the effectiveness of their marketing strategies. By comparing the prices of similar products and services, businesses can determine the most effective strategies and make adjustments if necessary.
- It offers a way to evaluate the effectiveness of promotional activities. By comparing prices before and after promotional activities, businesses can determine whether their efforts are resulting in higher sales.
Limitations of Market based price
Market based pricing has certain limitations to it. These include:
- Lack of visibility in the market. Market based price is based on the prevailing market conditions and thus it is difficult to get an accurate picture of the current pricing conditions.
- Difficulty in predicting future market conditions. Market based pricing relies heavily on present market conditions and thus it is challenging to predict changes in the pricing of similar products.
- Issues with pricing strategy. It is difficult to determine the optimal pricing strategy when the prices are based on market forces.
- Pricing power of suppliers. Market based pricing may give the suppliers a greater control over pricing policies which can lead to higher prices and reduced profit margins.
- Lack of consideration for customer needs. Market based pricing does not take into account the individual needs of customers and thus does not provide the best value for money.
- Price Discrimination: Price discrimination is a pricing practice in which products or services are sold to different customers at different prices. This is done to maximize the profits of the seller by charging different prices for the same product or service to different customers.
- Cost-Plus Pricing: Cost-plus pricing is a pricing strategy in which the price of a product is determined by adding a markup to the cost of production. This pricing strategy is commonly used to set prices for products that have a high cost of production but low demand.
- Competitive Pricing: Competitive pricing is the practice of setting prices based on the prices of similar products offered by competitors. This pricing strategy is used to attract customers by offering a price that is lower than the prices of the competitors.
- Value-Based Pricing: Value-based pricing is a pricing strategy in which the price of a product or service is set based on its perceived value to the customer. This pricing strategy is used to maximize profits by charging a price that reflects the perceived value of the product or service.
In conclusion, market based pricing is one of the many approaches to setting prices for products and services. Other approaches include price discrimination, cost-plus pricing, competitive pricing, and value-based pricing. Each of these pricing strategies has its own advantages and disadvantages, and the best strategy to use depends on the product or service being sold.
References
- De Toni D., Milan G. S., Saciloto E. B., Larentis F. (2017).Pricing strategies and levels and their impact on corporate profitability. Elsevier Editora Ltda, Filipe Quevendo Silva editor, São Paulo
- Leigh A. (2018).What Is a Market-Based Pricing Strategy?. Article from Chron, Updated June 29, 2018
- Netseva-Porcheva T.(2011). Value Based Pricing- A Success Factor in the Competitive Struggle. University of National and World Economy, Sofia, Bulgaria
- Sensfuß, F., Ragwitz, M., & Genoese, M. (2008). The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany. Energy policy, 36(8), 3086-3094.
- Wuollet Joonas (2013).Pricing Strategy and Revenue Models: A Multiple Case Study from the IT Service Sector in Finland. Aalto University School of Business, Finland
Author: Anna Korzeń
