Competitor-Based Pricing
Competition-based pricing describes the situation where a firm does not have a pricing policy that relates to its product, but reflects the pricing decisions of competitors. Sometimes this simply takes the form of a firm copying their competitor's pricing and not conducting their own pricing research. Sometimes such pricing can take the form of a firm setting a market share objective and discounting their price relative to their competitor until they attain it. Similar to competition based pricing, going rate pricing reflects the price that is being used by most of the companies within the industry, an industry standard more or less.
Competitor Analysis
Companies that employ competitor-based pricing can use computer programs such as this to analyze market share.
The competitor-based pricing strategy is typically used by fringe firms, in an industry with one or two dominant companies. In fact, it is sometimes referred to as the "follow the leader strategy. " Its main advantage is ease of use. Extensive marketing research and statistical analysis are not required. The problems with competition-based pricing are that:
- It encourages firms to ignore their unique value proposition.
- It can lead to price wars. For example, if a firm sets a market share objective when the market size is fixed or declining, then this immediately signals that this gain in market share will come at the loss of a competitor.
- Focusing on market share does not necessarily lead to maximum profits.
Competitor-based pricing is purely reactive. Price cannot be used as a variable when constructing a marketing mix; it becomes a constant over which the firm has no control. Instead of setting market share objectives, firms should focus on identifying the most profitable segments to serve, and finding ways of profitably serving them while protecting themselves from price wars.