Competitor-Based Pricing
Organizations that sell products or services may look at what price a product is generally being sold at and set that as a target for the sales price.
LEARNING OBJECTIVES
Understand why matching the price of competitors is important, and how it can be misused (i.e. price fixing)
KEY TAKEAWAYS
Key Points
- Determining the price of a product or service can be approached many different ways, from consumer willingness to pay to pursuing the lowest possible cost for the consumer.
- Competitor -based pricing is the strategic approach in which a company tries to match (or perhaps better) the price point set by key competitors within the industry.
- Competitor-based pricing is particularly useful for new entrants, who are trying to achieve the efficiency and low price of more mature and established competitors.
- Competitor-based pricing can be inappropriate in markets with limited competition, as it could essentially lead to price fixing.
Key Terms
- price fixing: An illegal agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
Pricing Overview
Determining the optimal price for a given product or service can be approached in many different ways. Some organizations simply look at what it will cost (on average) to produce a product or service, and sell it at an acceptable profit margin above that expense rate. Other businesses may focus more on what the consumer is willing to pay, and try to capture as much of that potential as possible. Other organizations may be non-profit oriented, and will sell at the lowest possible price while remaining in business.
Pricing: Sellers price products in order to obtain a profit margin that is above the expense rate.
Pricing on Competition
Organizations that sell products or services, usually in mature industries, may look at what price a product is generally being sold at and emulate that sales price. This can be done for a variety of reasons, and firms must be careful of ethical and legal concerns when considering this approach:
- Customer Expectation – In some industries, competitor-based pricing is the best way to ensure customers pay what they expect to pay. A cup of coffee, for example, is very rarely priced too much differently from the competition. Customers don’t expect to pay $5 for a coffee, and therefore companies that sell at that price point will be quickly beaten by the competition.
- Competitiveness – Along similar lines, remaining competitive (particularly for goods that are not easily differentiate) often requires matching or beating the price of the competition. Many companies will even match competitor prices as a policy, which is to say that if a consumer finds the same product somewhere else for cheaper, the organization will match that price in order to retain the customer. Competitor-based pricing ensures the organization can remain competitive.
- Follow the leader – For newer entrants in an industry, keeping pace with the industry standard or industry leader is sometimes useful. This motivates the firm to match (or exceed) the more efficient and mature players in an industry, and sets a benchmark for what is feasibly accomplished in terms of efficiency and low-cost strategies.
Legal Concerns
While competitor-based pricing may be in pursuit of the cheapest possible price for consumers, this is unfortunately not always the case. Price fixing is a risk for organizations that pursue this pricing strategy, as it essentially would allow industries which are oligopolies (with a small number of providers) to remove the competitive aspect of capitalism through establishing a fixed price across all firms.
All this really means is that organizations within certain industries are NOT allowed to agree on a price that each competitor will stick to. If organizations were allowed to do this, competition on a key component of the marketing mix would be lost completely (i.e. price). Without this competitive force, organizations would gain pricing power over consumers through price fixing. As a result, competitor-based pricing is more appropriate for firms trying to grow more efficient and become more competitive, but not as appropriate for firms who are already established.