Being exposed to a highly competitive business environment has its pros and cons. Companies that can effectively maintain the pressure often succeed and become the ones leading the industry. In turn, many firms that cannot manage the competition become obsolete. In this article, we explore the key aspects of market-based pricing and what can be done to avoid risks.
What exactly is market-based pricing all about?
Market-based pricing is a strategy often employed by companies to price their products and services based on the prices offered by competitors along with different factors influencing the market. Businesses can use two key strategies in pricing – lowering or increasing them. Each approach requires particular conditions and depends on various objectives. Usually, reducing prices is done to attract more customers and increase sales volumes. In turn, rising prices highlight the uniqueness of a product or service.
Market-based pricing is a strategy allowing meet market turbulence and helps deal with fierce competition. The post-COVID-19 era, marked by drastic economical changes, brought a new perspective on the role of competition and the ability of companies to survive it. Yet, market-oriented pricing uses competitive data to create benefits out of competition. Luckily, firms now have innovative technologies to use. For instance, advanced algorithms as offered by price scraping software grant new capabilities in pricing and help businesses withstand any challenges on their way.
How to calculate it
One of the key questions about market-based pricing is about the methods of calculating it. In such a case, one does not need extensive knowledge of the model to calculate it effectively. In essence, to calculate market-based pricing, one can use three elements. There is the cost of the product, market factor price, and premium factor. Summing up all these elements grants you the price.
The basic guide to market-based pricing
To get a proper outcome from market-based pricing, one needs to know where to start. In general, factors like business objectives, retailer type, industry, market, and competitors are primary elements to consider when engaging in market-based strategy. In such a case, competition stands as the highest priority. When it comes to starting an effective market-based approach, there are the following aspects to consider:
- Relevant sales data available. Preferably, you need to consider historical sales data to understand how your pricing strategy has changed over time.
- Competitive data. As was mentioned before, you cannot get proper market-based pricing without information on competitors.
- Variables to consider in pricing. Make a checklist of various factors to consider, the pens correlating to your business objectives.
- Google Analytics data and promotions. You can learn how to use Google Analytics and further use the instrument for your benefit.
These elements should be considered as a starting point for an effective market-based pricing strategy. What is more, you should not underestimate the importance of SKUs, especially when it comes to deconstructing the given portfolio of products available. Depending on the product’s lifecycle stage, each given factor mentioned above can be beneficial more than others. Effective market-based pricing is all about proper portfolio segmentation and the right approach.
What are pricing KVIs?
What are KVIs? These are low-margin products in one’s assortment. They are often high-velocity, which means they have the most appeal to customers. The significance of KVIs stems from the fact that they drive the entire price value perception. The best pricing approaches and price logic is often employed to find how to price KVIs accordingly. Usually, when making purchasing decisions, consumers compare the prices on KVIs across various vendors in the market. As an outcome of the investigation, customers find the optimal price.
Essentially, market-based pricing is all about the proper pricing of KVIs. It helps keep customers loyal and find new consumers to increase the demand. Similarly, focusing on competition almost solely relies on exploring the competitors’ KVIs. Yet, when engaging in such an approach, one should be careful. If competitors try to make their KVIs more appealing to customers, they can engage in a constant war of lowering prices. As a result, all companies involved in the struggle will create a situation in which they cannot maintain the approach, harming the entire market.
Taking control of the risks of market-based pricing
At this point, effective implementation of a market-based pricing strategy depends on the ability of a company to manage risks and balance between engaging in price wars and getting the most benefit of pricing. To maintain the risks, one should understand how they occur in the first place. Often, there is no challenge in tracking down competitors. The primary problem stems from tracking too many competitors or tracking the wrong ones.
It is paramount to track down competitors employing pricing strategies that directly affect your business. Besides, one should narrow down the pool of rivals to avoid spending too much effort on the strategy. Luckily, there are tools available that can help process a great deal of data in a matter of minutes. These instruments use complex algorithms and work with only a little input from a user. Here are more details on how advanced pricing tools like price scraping software function:
- The starting point for an algorithm is to determine how a competitor’s pricing strategy impacts your business. It is done by comparing rivals’ prices and sales statistics.
- The other moment is about analyzing the portfolio to segment products. Usually, assortment segmentation is achieved by calculating the price elasticity of products and price elasticities between different SKUs.
As an outcome of these two functions, a company receives information on which competitor to follow and what pricing strategies to consider.
Market-based pricing is an approach that helps build the best prices based on understanding the market and the competition. Proper application of the phenomenon grants competitive advantage and customer loyalty. It all depends on the pricing of KVIs and choosing the right competitors to track. Luckily, there are various advanced methods like price scrapping software to consider. They make pricing easy and seamless.