There are several different pricing strategies that can be used and these are broadly categorized into: cost-based methods, competition-based methods, market-based methods, perception-based methods and pricing strategies for introducing new products.
Competition-based pricing
Three different approaches to setting prices based in comparison to the price set by its competitors can be found in this category depending on the marketing objectives of the business. The pricing strategies include competitive pricing, price leadership and predatory pricing (destroyer pricing).
1. Competitive pricing
Competitive pricing involves setting a price at the level similar or lower to that of competitors’ products which are already established in the market. It is because in many markets competition is very high, so firms often charge similar prices to each other for similar products without strong brand advantage to avoid a price war. Customers tend to believe that products with similar prices have the same quality as products sold by other firms. If a business has a good brand image and loyal customers, then it may use competitive pricing when launching new products which are similar to those already on the market.
When is competitive pricing used?
Competitive pricing is used for pricing both new and existing products. For new products, when the business already has a good brand image and loyal customers. For existing products, those that were previously introduced to the market using price skimming or penetration pricing because competitors will eventually enter the market with similar products, so the new pricing strategy is necessary
Walmart and Best Buy both offer similar prices for similar products. If you find a product for a lower price at another store, you can bring in the ad and they will match the price.
✅ Advantages of competitive pricing:
Competitive pricing can be a very effective way to attract customers. When customers see that a company is offering a slightly lower price than its competitors, they are more likely to do business with that company. It can attract customers away from those competitors. When prices are similar to prices of products sold by competitors, the business can compete on other things it might be better at such as quality, customer service or after-sale services.
❌ Disadvantages of competitive pricing:
If the market has a price leader, then this strategy will not be possible as the price set by the market leader would need to be followed. Otherwise, market share will be lost because customers will buy from the industry leader. The business will still need to find ways of competing in order to attract sales. Additionally, it can lead to a race to the bottom. If all of the companies in an industry are competing on price, they may all be forced to lower their prices. This can lead to lower profits for all of the companies in the industry. If a company prices its products too low, it may not be able to make a profit. This can lead to financial problems for the company.
2. Price leadership
Price leadership exists in markets dominated by large companies. There is usually one dominant firm and other firms simply charge a price based upon that set by the market leader. The company that sets the price is known as the price leader. Competitors then follow the leader by setting their prices based on the price of that market leader.
When is price leadership used?
Price leadership is a strategy often used for selling the most popular brands in a particular market, or selling the best-selling products. When customers think that there are none or few substitutes for such products, then the dominant firm can set its own prices.
In the airline industry, the price leader is usually the largest airline in the market. This is because the largest airline has the most bargaining power with suppliers and can therefore negotiate the lowest prices. Other airlines in the market will often follow the price leader's lead in order to remain competitive. In the retail industry, the price leader is usually the largest retailer in the market. This is because the largest retailer has the most customers and can therefore buy products in bulk at a lower price. Other retailers in the market will often follow the price leader's lead in order to attract customers. In the technology industry, the price leader is usually the company that has the most popular product. This is because the company with the most popular product has the most bargaining power with customers. Other technology companies in the market will often follow the price leader's lead in order to remain competitive.
✅ Advantages of price leadership:
Price leadership can help the dominant business to increase profits. When the market leader sets a relatively high price, other firms in the same industry will enjoy higher profit margins.
❌ Disadvantages of price leadership:
Smaller firms which produce similar products will find it very difficult to set a price that is very different to that of the market leader. When the dominant firms set a very low price, this will create problems for other firms as they will not be able to match the price as they do not have the same economies of scale as the market leader. Hence, they may not be able to make a profit. This can lead to financial problems for the company. Additionally, if other companies in the industry follow the price leader’s lead and lower their prices, it can lead to a situation where all of the companies in the industry are losing money. This can be a very difficult situation for businesses to recover from.
3. Predatory pricing (destroyer pricing)
Predatory pricing (destroyer pricing) involves temporarily reduction of the price comparing to the price of competitors’ products in a deliberate attempt to undercut them. Firms compete mainly by a series of intensive price cuts. This might even mean selling products at below cost value. The main aim is to force rivals out of the market as they cannot compete profitably any more.
When is predatory pricing (destroyer pricing) used?
As this pricing strategy is very aggressive, it offer lead to price wars which are common in the supermarket, airline and mobile phone industries.
Walmart is a large retailer that has been accused of predatory pricing. In the 1990s, Walmart was accused of selling staple goods, such as butter, milk, and laundry detergent, below cost in order to drive out local competition. Target is another large retailer that has been accused of predatory pricing. In the early 2000s, Target was accused of selling prescription drugs below cost in order to drive out local competition.
✅ Advantages of predatory pricing (destroyer pricing):
If predatory pricing strategy is successful, the business will benefit from being in a more dominant market position. Therefore, it will be able to raise its prices to recoup any losses incurred during the price war.
❌ Disadvantages of predatory pricing (destroyer pricing):
Although price wars can bring some benefits to customers in the short-term, predatory pricing itself is illegal in many parts of the world as it is regarded as an anti-competitive trade practice. In the US, The Sherman Antitrust Act of 1890 prohibits predatory pricing and other anti-competitive practices. The Federal Trade Commission (FTC) is responsible for enforcing the Sherman Antitrust Act.
