Pricing is flexible. It means price alteration always happened as a response to a tight competition environment. All company try to deliver competitive price to attract prospective customer. Therefore price competition always happened. As a consequences, many company try to implement competition based pricing.
In this article I will explain you about the theory of competitive pricing. So, you can implement it to your business once you read this.
Thomas and Holden (2001) said that the ability of company to be a price leader (or price leadership) is not only determined by how big it's market share, but also because it's management and system is efficient, it has good marketing strategy , and has a lot of experiences in implementing competitive pricing.
Competitive pricing strategy
There are four methods in competition based pricing strategy, they are:
- Above Market Pricing
- Below Market Pricing
- Loss Leader Pricing
- Sealed Bid Pricing
Let's discuss the methods one by one:
1. Above Market Pricing
According to the name, company that implement this method set the price above the market price. Companies that use above market pricing, usually the companies that are sure they have good reputation.
They have developed brand image consistently and finally have good perceived values. Beside that, they have build “prestige” in their product at their marketing campaign.
Usually they target a special people based on their marketing research and do a special advertising techniques to their targeted market. Commonly, their prospective customer is non price sensitive people.
These companies let their competitor set the price lesser than them. They focus on quality and prestige. The point are deliver a proper quality product to the right people with the appropriate price.
To implement this pricing strategy, the step you must do are:
- Create an outsanding product with outsanding quality.
- Build reputation
- Build high perceived values
Once you have good reputation in your industry, you will be easy to set above the market price.
Advantage of above market pricing is: your company will have strong position in your industry, because prospective customers will think that they deserve the best product with high amount of money. Your image and reputation will be better.
2. Below Market Pricing
Below Market pricing is the opposite of the method number one. The price is set lesser than market price. Many retailer implement this method, especially retailer who has generic product and has private brand.
Price is usually 8% up to 10% lesser than price leader who has good brand reputation.
Retailer who implement below market pricing, run a marketing campaign with special type of advertisement that emphasize as an alternative to price leader's product.
3. Loss Leader Pricing
This method is performed in order to run special promotion. A company that launches a new product sometime use this method too.
Loss-leader means the price is below the production cost.
The ultimate goal is not to increase the sales, but to attract people buying the product.
Commonly, a company that use this method have another “high profit” product. So, they use this method to attract people to come and then they offer another “high profit” product. This is like an upselling or cross selling strategy in order to get total profit.
The promotion is limited by time or limiited in 500 first buyer for example.
Usually, loss-leader pricing campaign is run in order to promote a place (attract more people to come to company's place both offline or online), not to promote a product.
The things you must concern is be careful to implement this method. Disadvantage of loss-leader pricing is: by implementing this method unappropriately, your image will decrease and prospective consumer will think your product is not good.
4. Sealed Bid Pricing
This method use a bid and usually involve a buying agency.
The illustration is like this:
If buyer want to buy a product, he will contact buying agency to give an information about product specification. Then buying agency meet several seller/producer to ask an offer regarding the quantity and specification. This offer is limited by time.
Afterwards the lower price is chosen as a winner.
Contractor is usually implement this bid system.
Summary
- There are four methods in implementing competition based pricing strategy.
- In implementing the methods, things must be concerned are: competitor, target market, advertising techniques, product quality.
- There are some advantages and disadvantages in implementing each methods, so you must choose a method carefully.
