Market-based pricing definition
/What is Market-Based Pricing?
Market-based pricing is the act of setting prices that are closely aligned with the current market prices of similar products. If a business creates products that are differentiated from those of the competition, then there may be room to set prices somewhat higher than market rates, depending on how customers perceive the value of the incremental differences offered by the company. Conversely, if a company's products have a low-quality or commoditized reputation with customers, then it may be necessary to set price points somewhat lower than the market rate in order to sell a reasonable quantity of goods. A smart product design will specifically include high-value features, in order to maximize the price that can be charged.
Impact of the Product Life Cycle on Pricing
The market may be willing to pay a higher price when goods are first introduced, and a lower price later, when competing goods reach the market or the product is considered to be late in its life cycle. If this is the case, a business could set its prices higher at the introduction of the product, and eventually drop its price points or offer discounts later, as market interest declines.
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Impact of Branding on Prices
Another option is to invest in product branding, so that consumers will perceive a firm’s products to have a higher value than those of its competitors. This approach only works when the cost of branding remains lower than the incremental gain generated by setting prices higher than the market price.
Advantages of Market-Based Pricing
There are several advantages to the use of market-based pricing, which are as follows:
No profit left on the table. When you set your prices in accordance with market rates, you are maximizing your product’s price point, and therefore the profit to be generated. Conversely, if you were to set your prices below the market rate, you would be selling at a price point below customer expectations, and therefore at a level that generates less than the maximum amount of profit.
Easy pricing. This approach requires only a modest amount of market research, since your prices will be close to those already being charged by competitors. At most, you will be making slight adjustments from the market rate, based on any incremental differences in the features and quality of your products as compared to those of the competition.