Setting prices for your products and services is one of the biggest challenges every business owner has to overcome, particularly in competitive fields like retail. Set your prices too high, and you risk alienating your consumers and driving them to your rivals. Set your prices too low, however, and you could damage your profit margins and push your brand to the brink of failure.
It is a delicate balancing act with a direct impact on your bottom line, and there are numerous strategies brands can employ to decide on the right prices at any given time. Market-based pricing is one such strategy, with cost-based and value-based pricing also available. This guide focuses on a market-based strategy, looking at what is market pricing, explaining its structure, and exploring how best to use it.
What Is Market-Based Pricing (MBP)?
Market-based pricing is a pricing strategy that focuses on setting prices for goods or services based on the market rate for those items (or similar ones) at the time. In other words, it involves setting prices that largely mirror those of your competitors and is essentially a mode of pricing driven by demand, competition, and the perceived changing value of a product over the course of its lifecycle.
It can also be referred to under other names, including market-oriented pricing, competition-based pricing, or even competitive pricing.
Distinguishing from Cost-Based Pricing
Market pricing is notably different from cost-based pricing because a cost-based strategy largely focuses on internal factors, while a market-based strategy is more reliant on external data.
Cost-based pricing involves working out prices by looking at how much a product or service actually costs to make and provide, often ignoring market demand and conditions at the time, focusing almost exclusively on profitability and counteracting production costs. Market-based pricing, meanwhile, is a much more flexible, dynamic approach, where prices are set primarily according to external market conditions.
Key Elements and Structure of a Market-Based Pricing Strategy
To fully understand the market price definition and how this pricing method actually functions, here is a closer look at the core elements involved in constructing a market-based strategy:
1. Competitors
A large part of implementing a market-based strategy involves competitor tracking, or examining the prices charged by competitors for the same or similar goods. Brands can then use competitor prices as benchmarks, either matching them or making their own prices slightly higher or lower in accordance with their brand’s market positioning, reputation, and product specifications.
2. Market Demand vs. Saturation
Demand essentially dictates the market price of any product, as demand only exists if people are actually willing to pay the requested amount. Additionally, when the market is heavily saturated with a product or service, its market price tends to decline.
3. Product Life Cycle
Naturally, product prices are often at their highest at the point of release. When a product is new and fresh, the producer or retailer can often charge a relatively higher amount for it, since competition may be low and demand is often high. As the product matures, competitors enter the market, and additional products perhaps surpass the original in certain aspects, its market price invariably declines.
4. Product and Brand Perceived Value
Brands can also consider their own reputation, positioning, and perceived value in the eyes of their consumers when implementing a market-based strategy. Those with strong reputations or those seen as providing better-than-average quality goods or services may enjoy the privilege of charging prices slightly above the going market rate.
In the grocery space, for example, supermarkets often tend to sell very similar products to one another. However, the stores with reputations for offering a slightly higher class of product may be able to get away with charging more for a product that is almost identical to one sold in a more budget-friendly supermarket. They still use the market price as a baseline, but can afford to exceed it slightly.
5. Price Sensitivity
Price sensitivity essentially refers to how much a change in a product’s price may impact the audience’s willingness to purchase it. Some products have higher levels of sensitivity, demanding a more cautious approach. This is particularly relevant in fields like fast-moving consumer goods, with lots of competition and customers who tend to be budget-conscious and discerning.
6. Public Perception
The public’s view of a product/service will also impact its market price, and this can change quite dramatically over time in accordance with changing public moods, views, cultural and societal conditions, etc. Products that may be seen as trendy at one time may be regarded very differently just a few years later.
MBP Calculation Formula
There is no singular fixed formula for calculating market-based pricing, but many brands tend to follow this basic rule:
- Market-based pricing = Cost of product + market factor price + premium
In other words, you take into account the cost you believe your product is worth, then look at its going rate on the market (market factor price), and finally add an optional premium to elevate your profits and align with your brand’s positioning.
The Process of Implementing Market-Based Pricing
Implementing market-based pricing is essentially a two-pronged process, with the first phase focused on research and the second on positioning.
First, brands must carry out competitive pricing analysis, examining the pricing, products, features, and standings of their competitors to understand the pricing benchmarks they should aim for with their own goods and services.
Research should also delve into customer opinions and the cost/value trade-off, via focus groups, studies, etc. The more relevant retail business intelligence you can obtain, the more information you will have to take forward to the next stage and inform your pricing decisions.
Second, with the data collated and analysed, businesses can then set prices in accordance with their positioning and profit expectations. There are three options here: you can set your prices at market, below market, or above market.
Setting at market means you will be in line with the going average rate. Below market can help your brand stand out as a value choice for consumers. Above market may seem counter-intuitive, but it is beneficial for brands wishing to position themselves as a superior choice to their rivals.
Naturally, as with any other pricing strategy, market-based pricing is not a tactic you simply deploy and expect to deliver continuous, consistent returns. It is something you must monitor, track, and adjust over time, in accordance with product lifecycles, changing levels of supply and demand, etc. Swift responses are necessary to stay ahead of the game and aligned with your competitors.
Strategic Advantages and Business Benefits of Market-Based Pricing (and How Assosia Assists)
MBP is a smart strategic choice in many sectors, as it allows companies to keep their prices relevant and reasonable at all times. With correct, consistent deployment, you can ensure your prices never feel excessively high (and therefore put off your consumers) or slip too low (and lead to loss of profits because of underpricing).
It is a particularly powerful strategy for industries that are competitive and evolve rapidly, like the aforementioned FMCG sector, helping brands stay competitive, meet consumer expectations, and improve both satisfaction and loyalty.
How Assosia Enables MBP
A global retail research agency with more than 20 years of experience, Assosia is a leading name in providing information and insights to enhance brand performance.
Through our various services in market research, retail analysis, and competitor auditing, combined with the power of our industry-leading pricing tool, we can give you the market data you need to construct and deploy a winning MBP strategy. Our clients rely on us to deliver precise, up-to-date insights, trend data, and tailored research plans to help them make data-backed decisions and ensure their prices are optimised at all times.
Disadvantages and Challenges of Market-Based Pricing
| Challenge | Explanation |
| Price Wars | If many of your rivals also use an MBP strategy, there is a risk of price wars developing, which can, in turn, cause profit margins to erode. |
| Reliance on Data | MBP demands a constant stream of real-time data, which can be difficult to obtain without the right tools or experts on your team. |
| Neglecting Internal Costs | MBP focuses mostly on external factors, rather than taking internal elements – like production cost – into account. |
| Perception Risks | If you change your product prices too often, customers could begin to see your brand as unreliable. |
Conclusion: A Balanced and Adaptive Approach to Pricing
Taking numerous factors into account, including external pressures, customer willingness to pay, competitors’ rates, and all-important supply and demand, market-based pricing is one of the most balanced, fair, and effective approaches to employ.
However, to make the most of MBP on an ongoing basis, you need data and specialist assistance. That is where Assosia comes in. As your strategic pricing partner, Assosia can provide the relevant expertise and tailored research to empower you in implementing a strategic and profitable pricing strategy.