Market-based pricing definition
/What is Market-Based Pricing?
Market-based pricing is the act of setting prices that are closely aligned with the current market prices of similar products. If a business creates products that are differentiated from those of the competition, then there may be room to set prices somewhat higher than market rates, depending on how customers perceive the value of the incremental differences offered by the company. Conversely, if a company's products have a low-quality or commoditized reputation with customers, then it may be necessary to set price points somewhat lower than the market rate in order to sell a reasonable quantity of goods. A smart product design will specifically include high-value features, in order to maximize the price that can be charged.
Impact of the Product Life Cycle on Pricing
The market may be willing to pay a higher price when goods are first introduced, and a lower price later, when competing goods reach the market or the product is considered to be late in its life cycle. If this is the case, a business could set its prices higher at the introduction of the product, and eventually drop its price points or offer discounts later, as market interest declines.
Related AccountingTools Courses
Impact of Branding on Prices
Another option is to invest in product branding, so that consumers will perceive a firm’s products to have a higher value than those of its competitors. This approach only works when the cost of branding remains lower the incremental gain generated by setting prices higher than the market price.