Market Based Pricing - Meaning, Importance & Example
Published by MBA Skool Team, Last Updated: September 14, 2019
What is Market Based Pricing?
In market based pricing a company does the analysis of various prices of similar products. Market Based Pricing is defined as a process of setting prices of goods/services based on the current market conditions. A critical analysis of the product’s features is done and then depending on whether the product has more or less features than the competitor’s product, the price is accordingly set higher or lower than the price of the competitor’s product.
If a company has a differentiation strategy while creating a product then that can be placed at a price as per the company requisites. The first mover advantage gives a helping hand in market based pricing to these companies. The aspects to be considered are customer needs, competition, and price sensitivity.
Here, the competitor’s products are compared with one’s products and then prices are accordingly determined. If the features of a product are more than that of competitor’s, then company may set prices same to provide better value to the customers or may set high to account for additional feature.
Market based price also called competitive based price allows the company to control prices according to market condition and competitor prices. Market based pricing is also a by product of product demand. With higher demand, a company may offer higher prices even if similar products have a lower price thereby introducing competitive price levels. The life cycle of the product also determines the market based pricing. At the initial or introduction stages we see that the prices can be fixed as per the company’s requisites, due to no or less competitors. But as the product progresses into its life cycle, the price needs to be more market dependent and determined.
The market based price is higher towards the beginning and lower towards the end of the cycle. The analysis of the price sensitivity of the is very important while configuring the market based price. If the customers are less price sensitive it is very easy to determine that the price can be above the competitor’s price. The market based pricing gives out messages to customers and competitors about what the brand is trying to convey. Too highly priced the customers may not buy the product.
While proceeding for Market Based Pricing, following things are kept under consideration:
1. Customer Needs
3. Price Sensitivity
The main advantage of Market Based Pricing is that one can get hold of his customers and maintain sales which would have affected a lot in its absence of implementation.
Formula for Market Based Pricing
Market based pricing = cost of product + market factor price + premium*
Market factor price= the price added to the cost of the product due to the market factors like competitor product price and strategy, price sensitivity of the customer.
Premium=is the price added to the cost of the product if the product is a differentiated one.
Example Market Based Pricing
Consider tickets for a newly released movie. People go crazy to watch new movie at the earliest and are ready to pay high prices. As a result, they are highly priced during first week of the release but later on the price of the ticket comes down. So we can see that based on demand, the prices of tickets are determined. This involves a market based pricing strategy.
Hence, this concludes the definition of Market Based Pricing along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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