Imagine your ideal customer. Now, imagine how much they would pay for an HVAC service. A plumbing service? An electrical service?
Market-based pricing is all about finding that fair market value for your services. It’s a simple concept: you price your services based on what the market will bear. In other words, you charge what your customers are willing to pay.
Of course, there’s more to it than that. You also have to consider the cost of goods and services, as well as market trends. But market-based pricing is a great starting point for any business.
Compared to the cost-based pricing method, the market-based approach can be more of a guessing game. You have to be in tune with your market and understand what they’re willing to pay for your services. But if you can master market-based pricing, you’ll be able to charge what you’re worth and make a profit.
So how do you get started? With this simple guide, we’ll show you everything you need to know about market-oriented pricing and provide helpful examples along the way.
Market-based Pricing Definition
Market-based pricing is a pricing strategy that takes into account the market situation to set its price. With this method, the company not only focuses on competitors but also on customer demand when making decisions about prices.
There are three main options for pricing compared with competitors: at market price, below market price, or above market price. Each of these has different implications for profits and promotion strategies.
For example, if a plumbing company charges a price that is only slightly above the market price, they may compete on other factors such as quality, convenience, or after-sales service.
On the other hand, if the company charges significantly below the market price, it may be able to undercut the competition and gain market share. However, this could also lead to lower profit margins and might not be sustainable in the long run.
Ultimately, market-based pricing is about finding the right balance for your company based on customer demand and the competitive landscape.
Do you think that your business could use market-based pricing?
At Wizard of Sales®, we help home service businesses take a more sophisticated approach to pricing and negotiation. Our Hybrid Pricing Model™ allows you to present honestly persuasive pricing that protects profitability.
Book a demo with us today to learn more!
Market-based vs. Cost-based Pricing
Market-based pricing is a method of setting prices based on market conditions. This approach takes into account two key market variables: customers and competitors.
When using market-based pricing, companies consider how much customers are willing to pay for a product or service, its perceived value, as well as what prices competitors are charging. Based on this information, they then set a price that they believe will be both competitive and attractive to customers.
Cost-based pricing, on the other hand, is a method of setting prices based on the costs incurred by the company. This approach simply allocates those costs to the selling price, plus the desired profit margin (markup).
Cost-oriented pricing is a bit more popular as it’s easier to implement and manage. While market-based pricing can be more complex and time-consuming, it offers the advantage of being more responsive to market conditions. This can help companies better meet customer needs and stay ahead of the competition.
The Importance of Market-based Pricing
Market-based pricing is a key element of any healthy market economy. It allows buyers and sellers to transact business without the interference of government or other outside forces.
In a market-based system, prices are set by the market itself, based on the interaction of supply and demand. This type of pricing is generally considered the most efficient way to allocate resources and promote economic growth.
There are a number of advantages to market-based pricing:
- Leads to more efficient resource allocation
Prices signal to producers what consumers are willing to pay for goods and services, so producers can respond accordingly. This helps ensure that scarce resources are used in the most efficient way possible.
- Promotes economic growth by encouraging innovation and competition
Producers are always looking for ways to increase their profits, so they are constantly innovating and trying to find new and better ways to produce goods and services. This drives economic growth and makes everyone better off in the long run.
- Considered to be fairer than other pricing methods
Prices are set by the market itself, so they reflect the true value of a good or service. This is in contrast to methods like price controls, which can distort prices and lead to unfair outcomes.
Market-based Pricing Calculation
The market-pricing formula looks like this:
market-based pricing = cost of product + market factor price + premium
To use the market-pricing formula, simply plug in your product’s cost and market factor price. The market factor price is what a similar product in the market costs, and the premium consists of any additional costs you want to factor in, like the cost of materials, production, or labor.
Once you’ve plugged in all the relevant information, you can compare your end cost to the market cost and set your price point accordingly. This market-based pricing method is a great way to ensure that you’re charging a fair price for your product and making a profit.
Main Types of Market-based pricing
There are several different types of pricing strategies in marketing. Here’s a look at some of the most common ones that you can use in your business:
This involves setting a high price for a new product or service during its initial launch period, in order to recoup the costs of development and marketing. The price is then gradually lowered as more competitors enter the market and demand decreases.
Unlike price skimming, penetration pricing sets a low price for a new product or service in order to quickly gain market share. The price is then gradually increased as the product becomes more established.
This type of pricing charges different prices to different groups of consumers, based on factors like location, quantity purchased, or time of purchase. This helps to maximize profits by taking advantage of different groups’ willingness to pay.
This is when a temporary price reduction is offered to generate interest and increase sales. Promotional pricing is often used in conjunction with other marketing tactics like advertising or coupons.
With premium pricing, a high price is charged in order to convey quality or exclusivity. This can be effective for luxury items or those with a unique selling proposition. It is effective in industries where buyers are willing to pay more for perceived value.
Loss leader pricing
This is when a product is offered at a low price in order to attract customers who will then buy other, more profitable items. This is common in grocery stores, where customers are lured in with low-priced items and then purchase other items while they are there.
This type of pricing uses psychological principles to influence customers. For example, an HVAC club membership could be priced at $39.95 instead of $40 because the .95 makes it seem like a better deal.
Market-Based Pricing Strategy Examples
You don’t need to go far to witness market-based pricing in action. Here are a few common examples:
1. Grocery stores
Grocery stores are known to charge different prices for the same item based on demand. For example, you’ll typically find that items are cheaper during the week than on weekends. This is a perfect example of discremetory pricing, where the price is set based on when the customer is buying.
2. Movie theater tickets
Consider purchasing movie theater tickets for a recently released film. People get crazy about new movies and are willing to pay a lot of money to see them as soon as possible.
Therefore, tickets are expensive during the first week of release, but the price of the ticket drops subsequently as time goes on. With this, we can observe that ticket prices are set based on demand, following the price skimming strategy.
3. HVAC club memberships
HVAC club memberships often consist of varied price points depending on the customer’s level of service. Let’s say a company has a club membership for $23.97 a month, but the customer can pay as low as $19.97 a month if they pay in advance for the year. This shows how psychological pricing can be used to easily influence consumer behavior.
As you can see, there’s so much you can do with pricing in marketing. When executed correctly, it’s a highly lucrative strategy that prices your products and services in a way that will ensure you’re making a profit, while also considering what your customers are willing to pay.
And when your customers feel like they are being charged fairly while also getting exceptional value for their money, they’ll be more likely to continue doing business with you, and just as more likely to recommend you to others.
Of course, not everyone is a fan of market-based pricing. Some people feel that it’s too volatile and unpredictable. At the end of the day, whether or not you use market-based pricing as a strategy is up to you. But if you do decide to give it a try, make sure you do your research and understand the risks involved.
However, if you want to skip all the trial and error of finding the perfect price for your product or service, you can count on us.
At Wizard of Sales®, we have a team of experts who know how to price your products and services using our seamless Hybrid Pricing Model™. This model goes hand-in-hand with your inventory choices and will help you zero in on upsell, cross-sell, and bundling opportunities to elevate conversions, average sales, and incremental gross profits.
Sound like your kind of thing? Book a demo with us today to learn more!