Market-based pricing strategy involves a process in which the product prices are fixed after studying the costs of the similar products available in the market. Depending upon what a product has to offer, more or less than the competitive product, businesses decide the prices for their products.
What is Market Based Strategy?
Simply put, market based strategy is a strategy where prices are estimated by studying the costs for the similar products followed by a price range that is suitable to the target market.
The market based pricing strategy is used by various companies like Coca Cola, Microsoft, Dell, Apple, Amazon, etc. that manufacture and sell things like soft drinks, softwares, computers, etc. As a consumer, you are likely to see various prices for the same soft drink.
The reason being market based pricing strategy. The actual prices of a product are determined after taking into account the pricing of the similar products offered by its competitors. After studying the cost and judging the response of the consumers about a particular product, the price for the product is fixed. It’s the business firms that determine the product pricing, even though there are different strategies involved. Similarly, the business firms that make use of this strategy, get to know the product pricing, profits and costs by considering the competitive environment of the products they make and sell.
For example, if Coke considers that the cost of making Soft drink A is higher than that of the similar product in the market, taking into account the expenses for marketing the product and the amount of returns that the product earns when sold, it will come up with a price range that will benefit the consumers and the consumers will still be willing to try the product.
Under this strategy, a business firm will create a price range for its product based on the price of the same product by the nearest competition. The margin is adjusted by the business firm considering the business objectives and the target market. This strategy is implemented in the market based pricing of a product.
As a result, different companies have different prices for the same product. Similarly, the products with larger volumes are more likely to have lower prices when compared to the small volume products.
If a business firm is of the opinion that its product is superior in some ways than the same product by its competitors, the business firm is likely to get the authority to establish a market based pricing strategy, which is different from that market based pricing strategy for the products of the similar business firm that is selling the same products.
In short, it is a pricing strategy that is used when the actual price to charge a consumer for a product cannot be determined until the market for the product is ready. It is basically a pricing strategy that changes based on the conditions prevailing in the market and the price of the competitive products.
Potential Challenges of Market Based Pricing Strategy
Although the primary aim of market-based pricing strategy is to maximize profit, it is a common fact that market based pricing strategy is likely to have several challenges that may affect the business performance.
- Inherent Costs
The first challenge a business firm has to overcome is the inherent cost of producing the product and delivering the product at the point of sale. While the strategy of the matrix pricing strategy and target costing strategy makes it more likely to rectify the impending challenges by reducing incidental costs, the producers are likely to incur additional costs for creating the pricing strategy as it is an essential part of the marketing plan that is used to offer the product to the consumers.
- Product Development
The second challenge in this market based pricing strategy is the product development. Even after the development of the product, there are many things that can affect the pricing of the product. For example, the way in which the product is delivered at the point of sale, the packaging of the product, the features of the product, the design of the product and even the background music played at the point of sale can result in enhancing or reducing the price of the product. Similarly, the marketing campaign that is conducted by the business firm can also affect the price of the product.
- Improving Competition
The third challenge is due to the fact that the improvements can result in reducing price and intensifying the competition, which is likely to result in lowering profit margins. The target of the business firm in such a case is to balance the price and the profits so that the product can be presented in a way that people are more likely to make choices in favor of the product.
- Pricing Decisions
The fourth challenge comes from the pricing strategy of competitors. Although the business firm is likely to use the product pricing strategy, the competitors are likely to provide a price that does not match the price of the competitor. For example, Coke and Pepsi are the two big competitors who make soft drink and are likely to have prices that do not differ much from each other. Consumers are likely to make purchasing and consumption decisions based on the price of the product.
- Competitive Price Sensitivity
The fifth challenge in the market based pricing strategy is the competitive price sensitivity. When a firm is using this strategy, it needs to understand the market, the consumers, the market, the competitors, etc. If the market in not developed as expected, or if the competitors are able to implement the same strategy for a longer time, the business firm is likely to incur losses as the consumers are likely to go to other firms that can provide them with the same product at a lower price.
The sixth challenge in the market-based pricing strategy is the competition. While a business firm has a product or service that is in high demand, it is likely to have a tough time when entering different markets with different competitors. If the competitors have access to better resources and facilities, they are likely to have a greater competitive advantage than the business firm, leading to the business firm incurring losses. For example, in the case of a supermarket, if the supermarket has access to better access, lower quality products are likely to occupy the shelves, leaving the supermarket to incur losses and weed out expenses that cannot be justified by revenues.
- Local Competition
The seventh challenge in the market based pricing strategy is the local competition. If the market-based pricing strategy is not well-implemented, local competitors are likely to take advantage of the situation and offer the product at a lower price. Even if the business firm has a competitive price for the product, its competitors are likely to undersell their products and services. This is further likely to lead the business firm incurring losses.
- Extended Range of Products and Services
The eighth challenge in the market based pricing strategy is extended range of products and services. Even if the business firm makes the pricing strategy for the product, it is likely to encounter many problems when it comes to determine a price for other similar products and services that are offered by the business firm.
- Problems of Scalability
The ninth challenge in the market based pricing strategy is problems of scalability. For any business firm, it is necessary to consider scalability issues before deciding on business strategies, as it can cause a huge loss to the business if it is not possible to have business strategies implemented correctly. For example, McDonald is a brand of an American company, which allows its franchisees from around the globe to use their brand name to sell burger as they see fit. This creates several critical challenges for McDonald when it comes to implement its pricing strategy, as even the owners of the franchises in various parts of the world have complete authority to implement their own pricing strategies. This is likely to lead to drastic reduction in the consumer base for McDonald, as the same product may have different prices in different parts of the world.
- International Competitiveness
The tenth challenge in the market based pricing strategy is international competitiveness. If a firm is unable to compete internationally, it is likely to incur losses as it is unable to gain the desired shares in the market.
- Competence for the Price
The eleventh challenge is competency for the price. In the case of an established brand, even if the product is selling like hot cakes, the price for the product is likely to be increased. This is because the customers are likely to switch to another brand.
- Supply Chain and Distribution Issues
Even if the product and service are excellent, if the supply chain is improperly handled, the customers are likely to switch to another brand. To implement the matrix pricing strategy correctly, the business firm needs to make sure that it has an efficient supply chain to service the customers.
The above discussion clearly establishes that there are several challenges that may affect the business performance when there is a competition based pricing strategy implemented.
High end expensive product:
The main problem with the business strategy is that, it can be quite expensive in the beginning, it also requires a lot of investment in the marketing and after sales service in the beginning. It is also very difficult to make these expensive products cheaply.
Where to Buy Cheap Products
The types of businesses or products that people buy are usually not the same. Different people buy different types of products for different reasons. Hence, the business strategy of most of the sellers or sellers in most of the categories is to ensure that each customer is satisfied with that particular business. The business strategy is based on addressing the needs of the customers.
Often customers buy a product or a service and then realize the benefits that they can get from the product or service or even from the seller. The market is dependent largely on needs. In a healthy and growing market, the market-based pricing strategy developed by the business firm and the availability of the product will meet the needs of the customers.
Market Based Pricing Strategy:
Although there are several challenges in the market based pricing strategy, their implementation is likely to bring in high revenue as it is based on customer satisfaction. For example, a teacher has to develop a market based pricing strategy to sell the lessons to students in a class. The teacher first takes into consideration the level of knowledge of each student, understands their understanding and analyzes the problems that they come across during the education process. Based on this, he will decide the price and content of the lessons, so that students are happy with the lessons and are able to study and learn easily. This ensures that the students take more lessons from the teacher. When the number of students taking the lessons increases, the teacher is able to increase his revenue and enjoy a stable and sustainable business.
In some cases, the market based pricing strategy may be unsuitable for a category or a product. For example, the product category of a health product requires more research and development than the product category of a fashion product or a fast moving consumer goods. Health products must meet the needs of the customers and must be in line with several other things, such as the manufacturing process and the supply chain. It can also be said that the cost of the product may be very high and the revenue generated from the sale of the product may be small. Therefore, the business strategy is also to have fewer quality products at a reasonable price. It is also necessary to test the market with various quality products and follow the market-based pricing strategy.