This pricing method is dictated somewhat by competitors' prices
Competition-oriented pricing, also known as market-oriented pricing, involves basing prices on those of the competition rather than considering consumer demand and one's own costs. This method also considers the target market and requires analyzing and researching that market. As with most business strategies, competition-oriented pricing has its advantages and disadvantages.
How Competition-Oriented Pricing Works
A business can determine how to price its products based on its competitors' prices and what the business is trying to achieve. If the business is trying to appear higher-end or that it offers better quality than its competitors, it may want to price its own products higher. But if it's likely that this strategy won't result in increased sales, the business may opt to make its products more affordable by lowering prices.
When a business is unable to anticipate competitor price changes or is not able to make corresponding changes on time, the business may offer to match competitor prices. This allows the business to maintain a competitive price for those who become aware of the competitor's offer without having to change the price within the business's point-of-sale system.
Advantages and Disadvantages of Competition-Oriented Pricing
Competition-oriented pricing can keep price competition down, which could otherwise damage a business if prices are set too high. Setting a price based on a competitor's price can allow a business to avoid losing market share to its competitor. However, if a business and a nearby competitor prices their products too closely, other tactics may be necessary to attract customers. In addition, in keeping with the competition, a business may price its product too low, which can hurt profits, as a certain amount must cover production costs and other expenses.
Price-setters can also become too passive and lose sight of their price-setting responsibilities. Becoming too attached to prices based on what a competitor is charging can lull price-setters into a false sense of security so they don't realize when prices need changing.
Example of Competition-Oriented Pricing
If a popular chain store sells an item for $3.99, a newer store that's nearby might price the same or similar product at an identical price to capture market share. But this would mean that the price itself is not an incentive for consumers, so the store would have to find other ways to reach customers. This generally incurs costs, cutting into the bottom line.
But if the new store elects to price its product lower than that of the big store, the new store might draw more customers based on its prices alone. This is especially true if most of its products are cheaper than those at the big store and customers know it.
The Bottom Line
Price is an important aspect of a business's marketing mix, and changing the price can dramatically affect the marketing tactics necessary for success. When you're identifying a marketing mix, the prices of competitors will factor into how your business chooses to price its products, whether you're utilizing competition-oriented pricing or another method.