Pricing Decisions

Competitive and Related Products

Marketers will undoubtedly look to market competitors for indications of how price should be set.  For many marketers of consumer products researching competitive pricing is relatively easy, particularly when Internet search tools are used.  Price analysis can be somewhat more complicated for products sold to the business market since final price may be affected by a number of factors including if competitors allow customers to negotiate their final price.

Analysis of competition will include pricing by direct competitors, related products and primary products.

• Direct Competitor Pricing – Almost all marketing decisions, including pricing, will include an evaluation of competitors’ offerings.  The impact of this information on the actual setting of price will depend on the competitive nature of the market.  For instance, products that dominate markets and are viewed as market leaders may not be heavily influenced by competitor pricing since they are in a commanding position to set prices as they see fit.  On the other hand in markets where a clear leader does not exist, the pricing of competitive products will be carefully considered.  Marketers must not only research competitive prices but must also pay close attention to how these companies will respond to the marketer’s pricing decisions.  For instance, in highly competitive industries, such as gasoline or airline travel, competitors may respond quickly to competitors’ price adjustments thus reducing the effect of such changes.
• Related Product Pricing - Products that offer new ways for solving customer needs may look to pricing of products that customers are currently using even though these other products may not appear to be direct competitors.  For example, a marketer of a new online golf instruction service that allows customers to access golf instruction via their computer may look at prices charged by local golf professionals for in-person instruction to gauge where to set their price.  While on the surface online golf instruction may not be a direct competitor to a golf instructor, marketers for the online service can use the cost of in-person instruction as a reference point for setting price.
• Primary Product Pricing - As we discussed in the Product Decisions Tutorial, marketers may sell products viewed as complementary to a primary product.  For example, Bluetooth headsets are considered complementary to the primary product cellphones.  The pricing of complementary products may be affected by pricing changes made to the primary product since customers may compare the price for complementary products based on the primary product price.  For example, companies that sell accessory products for the Apple iPod may do so at a cost that is only 10% of the purchase price of the iPod.  However, if Apple were to dramatically drop the price, for instance by 50%, the accessory at its present price would now be 20% of the of iPod price.  This may be perceived by the market as a doubling of the accessory’s price.  To maintain its perceived value the accessory marketer may need to respond to the iPod price drop by also lowering the price of the accessory.