What Is Competition-Oriented Pricing?

This pricing method is dictated somewhat by competitors' prices

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Competition-oriented pricing, also known as market-oriented pricing, involves basing prices on those of a competitor rather than considering consumer demand and one's own costs. This method also takes the target market into account and it requires analysis of and research into that target market. As with most business strategies, it has its pros and cons.

How Competition-Oriented Pricing Works

A business can decide whether it wants to sell its own product at a price lower than its competitor's or higher than that price. The decision depends on what it's trying to achieve by basing its prices on someone else's. 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 product a bit higher. But if that won't necessarily result in increased sales and if the business wants its own product to be more affordable, it may choose to price its product lower.

Advantages and Disadvantages of Competition-Oriented Pricing

This pricing method can keep price competition down, which could otherwise damage a business. Setting a price based on a competitor's can also allow a business to avoid losing market share to its competitor. But it might also mean that other tactics are necessary if the business is going to reach customers because the price may not be enough of an incentive if it's about equal in both locations. The price may also barely cover production costs, or not even cover production costs, making profits too low or even non-existent.

Another mistake that can occur based on competition-oriented pricing is the fact that the price-setters can become too passive. They might 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 it when the prices need changing.

An 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 a similar product at an identical price in order 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' 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.