As we noted in the Pricing Decisions Tutorial, how competitors price their products can influence the marketer’s pricing decision. Clearly when setting price it makes sense to look at the price of competitive offerings. For some, competitor’s price serves as an important reference point from which they set their price. In some industries, particularly those in which there are a few dominant competitors and many small companies, the top companies are in the position of holding price leadership roles where they are often the first in the industry to change price. Smaller companies must then assume a price follower role and react once the big companies adjust their price.
When basing pricing decisions on how competitors are setting their price, firms may follow one of the following approaches:
- Below Competition Pricing – A marketer attempting to reach objectives that require high sales levels (e.g., market share objective) may monitor the market to insure their price remains below competitors.
- Above Competition Pricing – Marketers using this approach are likely to be perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is higher than what competitors offer.
- Parity Pricing – A simple method for setting the initial price is to price the product at the same level competitors price their product.