The Ultimate Guide to Market Pricing: Definition, Strategies, Tips and Examples

As a business owner, determining how to price your products or services is one of the most important decisions you‘ll make. The price you charge impacts everything from your profit margins to how customers perceive the value of what you offer. While there are many different pricing strategies out there, market pricing is one of the most straightforward and commonly used approaches.

In this ultimate guide, we‘ll dive deep into what market pricing is, the different market pricing strategies, how to calculate market price, the benefits and drawbacks, and tips for using market pricing effectively. By the end, you‘ll have a solid understanding of whether a market-based pricing model is right for your business.

What is Market Pricing?

At its core, market pricing means setting the price of your product or service based on what your competitors are charging for something similar. The goal is to match the "going rate" in your market so that you remain competitive.

For example, if you own a hair salon and other high-end salons in your area charge around $50 for a women‘s haircut, you would set your price in that same $50 range, assuming you are offering a comparable experience and level of service. Pricing significantly lower could make customers perceive your salon as lower quality, while pricing much higher could make it hard to attract clients.

Why Market Pricing Matters

Paying attention to competitors‘ pricing is critical for any business. Here‘s why market pricing is so important:

• It helps you stay competitive in your industry and attracts customers comparison shopping
• It ensures you aren‘t charging too little and leaving money on the table
• It avoids overpricing your products which could turn off potential customers
• It provides an anchor point for your pricing decisions so you aren‘t just guessing
• It‘s an easy and straightforward pricing strategy to implement

Of course, market pricing shouldn‘t be the only factor you consider. Your prices still need to cover your costs and allow you to make a profit. But looking at competitor pricing is an important piece of the puzzle.

3 Types of Market Pricing Strategies

Within market pricing, there are three main approaches a business can take:

1. Pricing Below the Competition

With this strategy, you consciously price your products or services below what competitors are charging. The goal is usually to attract extremely price-sensitive customers or rapidly gain market share. An example is a new streaming service undercutting Netflix and Hulu‘s monthly subscription costs.

The risk with pricing below the market is that customers may perceive you as lower quality. It can also trigger a profit-destroying price war if competitors rush to match your low prices. This strategy works best if you have significantly lower costs than competitors or it‘s temporary to gain initial customers.

2. Pricing at the Competition

Matching competitors‘ prices is the most common market pricing strategy. It signals to customers that you are a direct competitor offering a similar caliber product or service at the standard market rate.

For example, most mid-range hotels price their rooms similarly to each other for that city and star level. A customer choosing between a Hilton or Marriott expects to pay roughly the same rate and will make their pick based on location, amenities, loyalty programs, etc. rather than just hunting for the cheapest option.

3. Pricing Above the Competition

Premium pricing, or consciously setting your prices higher than competitors, is a strategy to signal that your offering is higher-end or luxury. Designer clothing brands, five-star hotels, and Whole Foods are examples of businesses that purposefully price above the market average.

The key to making premium pricing work is being able to justify your higher prices through your brand reputation, exceptional quality, or unique features. Apple charges premium prices for the iPhone because its strong brand enables it. A new entrant would likely fail with the same pricing.

How to Calculate Market Price

The market pricing formula has three components:

Market Price = Your Cost + Average Competitor Price + Premium

For example, let‘s say you make gourmet jam that costs you $3 per jar to produce. You look at 5 competitor brands and their average price is $7. You think your unique flavors and brand justify a $2 premium. Your calculation would be:

$3 cost + $7 average competitor price + $2 premium = $12 market price per jar

Keep in mind the premium is optional depending on your pricing strategy. If you want to match competitor pricing, you would leave that out. And for a penetration pricing strategy, you would actually subtract the $2 (or more) to price below competitors.

Pros and Cons of Market Pricing

As with any pricing model, there are benefits and drawbacks to basing your prices primarily on competitors. Here are some of the main advantages and disadvantages to weigh:

Pros:

• Simple and straightforward to implement
• Keeps your business competitive in your market
• Reduces risk of over- or underpricing your products
• Provides a logical starting point versus guessing on pricing

Cons:

• Doesn‘t account for customer willingness to pay
• Could result in prices too low to be profitable
• May not capture your unique value or differentiators
• Forces you to play by competitors‘ rules vs standing out

Tips for Using Market Pricing Effectively

1. Know your true costs. Pricing to match competitors only makes sense if you can do so profitably. Make sure you have a handle on your cost of goods sold and operating expenses.

2. Do your competitive research. Thoroughly research what direct competitors are charging, but also look at adjacent industries or substitutes to get a full picture.

3. Adjust the calculation as needed. The simple formula provides a starting point, but use your judgment to set a price that makes sense for your brand and objectives.

4. Combine with other pricing strategies. Market pricing works well in combination with cost-plus pricing to ensure your prices are competitive but also profitable.

5. Get customer input. Use surveys or conversations to understand what your target customers expect to pay and what they value to refine your pricing approach.

6. Revisit pricing regularly. Competitor prices change over time, so treat your market pricing as an ongoing process versus a one-time exercise. Plan to review quarterly or annually.

Examples of Market Pricing

Here are a couple examples of businesses using market pricing strategies:

Fast Food Chains
Fast food restaurants like McDonald‘s and Burger King largely use market pricing, keeping their core menu items priced within pennies of each other. A Big Mac is $3.99 while a Whopper is typically $4.19. They want their prices to be similar enough that customers make their decision based on taste preference or convenience.

Freelance Designers
Many independent graphic designers or web designers use market pricing to set their project quotes or hourly rates. They research what other freelancers with similar experience and quality of work are charging and aim to price themselves in the same range. Clients comparing different designer portfolios expect the pricing to be relatively similar.

Gas Stations
You‘ve probably noticed that competing gas stations on the same street usually have prices within a few cents of each other. Gas is a commodity where customers are very price sensitive, so station owners have to be extremely in tune with competitor pricing. They use market pricing, but are quick to raise or drop prices as the market shifts.

The Bottom Line

Market pricing is a tried-and-true way for businesses to determine how to set their prices relative to competitors. Researching the going rate and aiming to price below, at, or above the competition ensures that your pricing is not wildly out of line with what customers expect to pay.

However, market pricing is not the end-all-be-all. It‘s important to also understand your costs and profit margins, know how much your target customers are willing to spend, and have confidence in the unique value you provide. The most effective pricing strategy usually involves a mix of market pricing, cost-plus pricing, and value-based pricing.

As you launch a new business or product, we recommend starting with market pricing to get an initial sense of the landscape. But be ready to adjust and refine your pricing as you start selling and get a better sense of what the market will bear and where your offering fits. Pricing is both an art and a science, so use market pricing as a piece of the puzzle, not the whole picture.