Market Based Pricing is similar to competition based pricing. It asks you to set your prices based on market demand and trends. It is among the best pricing strategies for almost every product or service business.
This guide will discuss every relevant thing about market-based pricing and how to implement it in your business. Let’s begin the guide!!
What is Market Based Pricing?
Market-Based Pricing is a strategy where you decide your product’s pricing based on the current market prices of all the products. Simply put, you can say that market-based pricing means setting up the prices of your product based on what your competitors are charging in the market.
The market based pricing method allows you to set up the prices of a product at a higher rate even in its initial stage. Plus, it also allows your product to later increase prices up to the market prices. It keeps you competitive, along with increasing your business’s profitability.
Marketing based pricing strategy is often called market-oriented. Here, you compare your product’s prices to other available ones. However, unlike the competitor-based pricing strategy, you don’t simply put the prices as your competitors. You compare the prices here and then put the prices based on your product and situation.
It is also beneficial for you to utilize the market based pricing, as it will allow you to gain more market share. Because, during this time, you can charge higher even after others charge lower prices.
Market based pricing can also be formed because of the product life-cycle. Suppose you were the first to enter a market segment, and as time rolled out, the competitors entered the market and penetrated the prices. At that time, you might also need to try market based pricing to beat the competition.
What is cost based pricing in marketing?
Cost-based pricing refers to a method where you decide the pricing based on your production, manufacturing, and distribution cost. Simply put, you add a suitable selling price to the cost price to generate profit. Generally, you will see two types of cost based pricing in marketing: Cost Plus Pricing and Break Even Pricing.
In cost based pricing, you decide the price of your product after including several pricing strategies like going-rate, competition-based, or value-based pricing marketing.
In the Break Even Pricing, you have to calculate your manufacturing, production, & delivery cost and add more to this to generate profit for your business. The formula to generate the break-even pricing is to divide the (fixed cost) by the (price-variable cost).
Basic Market-Based Pricing Method
There is a simple formula to calculate your market based pricing. You must take your cost price, add the market factor price, and add one premium if you feel your product is unique.
Thus in simple terms,
Market-based Pricing = Cost of product + market factor price + Premium
If you want to calculate less about your business, there are some elementary methods too. They will allow you to set your prices easily. Let’s have a look at them:
1. Competitors
You can look at your potential competitor and get an estimate to calculate your pricing. For example, both Netflix and Disney+ have similar plans of around $6.99 to $8.99.
2. Industry Average
You can set up your market based pricing based on your industry too. There is not any standard average for any industry, but you can have an estimate by looking at the same companies as you. All it will take is your little research. Then, you can make certain adjustments based on your company.
5 Simple Step Market Based Pricing Strategy
Step – 1: Understand Your Business Goals
Firstly, you must deeply analyze your business goals and create a befitting marketing strategy. Thus, we have mentioned some of the goals relevant to your business.
- Focus on increasing the revenue for every customer
- To gain more market share
- To introduce new products in the market
- To fill your capacity and have proper utilization of your resources
- Beat out the competitors
- Penetrate the market
- To better the cash flow
- Try out new segments too
- Focus on the profitability of your company
- Improve your prospect presence and conversions
Thus, you must focus primarily on selecting your goals and moving further.
Step – 2: Look At the Pricing Criterias
Generally, there would be two criterias: your competitor’s pricing would be higher or lower.
If your customer has set up low prices, you have to set up your prices after good research. You should also ensure your current cost structure won’t get you into a loss. You can also make your product more valuable than others and sell it as a premium product at the finest prices.
If your competitors are selling premium quality products, then you have set up the prices accordingly. However, it allows you to charge higher to provide superior quality.
Step – 3: Focus On Your Target Audience
Now, you must define your target audience and focus on those only. You can ask yourself the following three questions to make your product value for money.
- What value do my products/service deliver to the customer?
- Does my product/service worth its price?
- Does my product/service fulfil the urgent requirements of my customer?
To succeed in the business, your business pricing model should be aligned with your customers wants. It must have a sense that your customer buys your products.
Step – 4: Analyze Your Direct and Indirect Competitors
You also have to analyze the pricing models of your competitors. Thus, in simple terms, you should thoroughly read your competitor’s pricing model strategy and consider why they are following it.
Step – 5: Finalize Your Pricing Plan
Now that you have gained all the essential information let’s start executing the action plan. We suggest you combine all the above elements and select a relevant price for your product that matches the value you provide to your customer. Then, you can invest the money in advertising and marketing to get back the returns.
Market Based Pricing Example
There are various market based pricing examples in our day-to-day life. It comprises restaurants, retail stores, car dealers, and more. Let’s look at some of the overall market-based pricing examples.
Example #1: Smart Phones
The mobile phone market is one of the best examples of market-based pricing. You have various options for choosing a mobile phone like Apple, Samsung, Google Pixel, etc. You will see the variations in pricing and specifications in each model.
However, the prices of phones generally decline due to the need for more promotion with time. This is how companies react to the market. You can also lower your prices depending upon its requirements.
Example #2: Automotive Industry
In the car industry, you will also see market based pricing. It is one of the most saturated markets that allow you to compete based on pricing and features.
Final Words
Market based pricing helps businesses to set the most accurate pricing for their products and services. It increases your chances of capturing the market share. We hope you find the relevant way to implement this pricing method in your business.