What does Market Based Pricing consist of?
Market Based Pricing is the process of setting prices based on competition after a study of the costs of similar products in the market.
Once the cost of the product in the market is known, prices are set above or below it depending on the product introduction strategy (market penetration or skimming) and those added values offered by the product.
How is Market Based Pricing calculated?
Market Based Pricing is calculated by taking the cost of the product and adding the market price plus a premium if the product is believed to have value.
Market Based Pricing = cost of the product + market factor price + premium.
You can also apply a pricing strategy by studying your competitors’ prices and using the average as your own price point.
Depending on what sector your company belongs to pricing is usually quite simple, if you take one or two competitors as a reference you can apply a reasonable pricing strategy.
Advantages and disadvantages of Market Based Pricing
Market Based Pricing has no difficulty, you take competitors’ prices and market prices, but at what point do you stop to think about the customer?
Advantages
A market-based pricing strategy is usually very effective, as long as what you sell is related to what your competition sells. If it is a very saturated market it is convenient to choose a price that will help you to be competitive and at the same time you will have to add a superior value to your competition.
If you know well the quality of your products, their cost and your target audience, this pricing method will surely work for you. If it works for your competitors, why not for you?
Disadvantages
Replicating your direct competitor’s pricing is like copying in class, if they make a mistake, chances are you will too. Also, if you have the same prices as your competitor, you are likely to get their same customer base instead of creating your own.
Another very negative aspect of Market Based Pricing is that you don’t think about the customer and that is the one you need to consider from the beginning. If you don’t understand your ideal customer, you are losing money from the start.
