There are three main pricing strategy methods: cost-based, customer-based and competitor-based. A business is likely to choose the last option if its products are in a highly competitive market where the consumer has an array of brands to choose from. It may seem logical that a lower price sells more, but there is more to competitive pricing than "pile them high and sell them cheap."
The starting point
There are a number of factors influencing pricing strategy, but the most basic ones are the costs of producing the product and the desired profit. Basically a company wants the product price to cover production costs and make some profit. if a business prices its product too high, consumers will look for an alternative, and if it's below the average price for a similar product the company can't afford to stay in business. One exception to low pricing in a competitive market is a product launch: a company often sets an introductory price for a limited time to encourage consumers to try the new brand.
The price vs cost gap
Professor Richard Gilbert of the University of California's Competition Policy Center says that the gap between price and cost is the essence of competition. He points out that the key sign of a competitive product sector is the size of the gap between cost and price: in a highly competitive market flooded with brand choice, the gap is small. However, price cutting is not the solution to increasing profits in this situation: improving the product and working on brand perception is a better approach. This allows the company to maintain a competitive price alongside market leaders.
Even if a company would like to set its prices above its competitors in a sector, most do not have the financial power to do this. Mid-range shampoo brands such as L'Oreal and Pantene are examples of a sector where pricing is similar. This is called "going-rate" pricing, in which the company looks at its nearest competitors' prices and uses the same pricing structure. Companies following the "going-rate" are also known as "price takers" because they accept the market price that is determined by supply and demand.
Advantages of competitive pricing
The advantage of setting product price in line with that of nearest competitors, rather than above it, is that the product price does not become a competitive disadvantage. In this scenario, the company has to use other non-pricing strategies to attract consumers and increase sales to get the required profit. Improving the distribution network to make the product more easily available, or gaining a reputation for great customer service, are both suitable methods.