Almost every decade, the market experiences a great deal of turbulence. Yet, in any given situation, only the companies that can withstand the competition survive. Respectively, overcoming challenges can be greatly aided by market-based pricing.
Current pricing approaches utilize the power of innovations to a great extent. There are complicated and sophisticated algorithms allowing to collection and process of massive volumes of data. As a result, companies can get invaluable insights into the market and competition, which is vital for staying afloat in turbulent conditions. Market-based pricing often utilizes the power of algorithms and ensures retailers have everything they need to gain competitive advantage.
Market-based pricing in a nutshell
In simple terms, market-based pricing is a type of competitive pricing that allows one to price products based on competitors’ prices along with other data points on the market. Varying on the employed business strategy and the company’s positioning, one can either lower or increase the prices based on the goal. Lowering prices is a viable strategy if a retailer wants to build up the customer base. Lowering prices is a viable strategy. In turn, if a firm intends to highlight the uniqueness of a product, increasing the prices is a path to follow.
In market-oriented pricing, competitive data is extremely important. The same approach of market-based pricing is closely related to competition and is directed at market trends driving competition. Considering the impact of COVID-19 on businesses, many retailers revisited the reliance on innovative pricing approaches. Simply put, they now cannot avoid them. As a result, tools like a price crawler gained a new meaning and demand. They help turn technological advanced into viable pricing strategies.
Calculation of market-based pricing
Market-based pricing formula is fairly simple. To calculate it, you simply need to know elements like the cost of a product, market factor price, and a premium factor. Summing up these factors grants you a market-based price.
It is also crucial to know that the market factor in the formula correlates to both competitive and other relevant market data. In turn, the premium factor represents the equivalent of moneya given business charges for providing premium customer services. Understanding these factors grants a simple vision of market-based pricing.
The starting point for market pricing
When looking for a starting point for market-based pricing, there are several key aspects to keep in mind. Smart pricing strategies start from working with data. However, along with the data you intend to use, it is vital to align the strategy with the existing business goals. Putting all the elements together, these are the things to look for when starting the deal with market-based pricing:
- Consider relevant sales and available competitive data. Get together all you have on competitors.
- Go through the historical sales. See how prices have changed with time and what factors drove the changes.
- Create a checklist of different variables to take into consideration in pricing. Explore the available insights on your business goals and use them within the market-based pricing strategy.
- Check Google Analytics data, stock clearance attributes, and promotions. There are various tools available, the ones that help make sense of any data you already have.
These are the starting points of an effective market-based pricing approach. Respectively, one of the best ways to reveal the true potential of market pricing is to consider particular SKUs in your portfolio. Different aspects of market-based pricing can be utilized depending on the given product’s lifecycle stages.
Market-based pricing showcase
Often, the effectiveness of market-based pricing comes to the point of determining the type of SKU that should be primed with a market-oriented approach. In such a case, the products guaranteeing the best price are directly linked to KVIs. A KVI is a high-velocity and low-margin development in one’s portfolio. Importantly, even if your pricing strategy offers better prices in any other group of products, without good prices for KVIs, you would lose revenue and customers’ interest.
KVIs are the cornerstone of market-based pricing. For instance, when tracking down competitors’ prices, you do not need to focus on all the products within their portfolio. Naturally, you can focus on competitors’ KVIs because they are the most vital ones to keep customer loyalty. Why? When selecting the products, consumers often look at prices for KVIs first. They compare the prices across competitors and later make the final purchasing decision.
Maintaining the checks and balances of market-based pricing
One of the key issues of determining prices based on competitive data is the potential race to the bottom that can take place. For instance, you investigated the market with competitive pricing and decided that a rival lowered the prices to get a competitive advantage. As a result, you start reducing prices as well. As a response to your actions, the competition proceeds with lowering the price further. Within such a vicious circle, the price lowering process can continue up to the point when both firms won’t be able to stay afloat.
Controlling the risks of the race to the bottom can be achieved by introducing AI and ML in pricing. It is a time when advanced software comes into play. Instruments like a price crawler use the power of AI and ML to develop strategies that help properly process competitive data and create conditions in which you won’t be dragged into the race to the bottom.
Advanced software used in market-based pricing gets to the very essence of what race to the bottom results from. Essentially, when tracking down competitors, one can face two key issues. First, a company might track down competitors that do not impact its prices. Second, a firm can track down too many competitors, thus wasting valuable resources and not getting the right insights. Advanced pricing software helps avoid these problems. It ensures you track the right competitors and do it balanced.
In the right environment, market-based pricing can be an invaluable tool. To get the most of it, you need to understand the starting points for the strategy and the focus on data. Use advanced software tools based on ML and AI. They will help you avoid the race to the bottom, focus on the right competitors, and receive the best insights on existing competitive strategies.
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