3.4.5 Competition-based pricing
Competitor-based pricing acknowledges the influence of competition in the marketplace. The entrepreneur must decide how close the competition is in meeting consumers’ needs. If they are close then the entrepreneur will need to set prices similar to the competition. This is known as a meet-the-competition strategy, which avoids damaging price wars (which an SME can ill-afford), thus maintaining profitability.
On the other hand, an undercut-the-competition strategy has become very common among retailers who have little control over product features and benefits or the promotion of products. However, there is a risk of starting price wars when using an undercutting strategy, which is not a recommended approach for a small firm with limited market share and financial resources. For more information see Pricing strategies.
Whichever pricing strategy is best for you, it is important to understand your cost base and ensure that you cover the basic costs of producing the product or delivering the service. Attention should also be given to the impact pricing has on the image of the product or service and the importance of complementing competitor offerings rather than trying to compete head-on (e.g. competing upon the basis of personalised service and superior delivery might be more effective than reducing prices).
Finally, if the new venture competes solely on price it may never be able to grow because the margin will be too small to allow for re-investment in the firm’s infrastructure.
Task 19: Pricing
Taking in to consideration what you have read, what approach to pricing is most appropriate for your product or service?
Note down your thoughts and the reasons why.