2021.8.20

What is Market Pricing?

Written by Kit Jenkin

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When you’re running your business, you need to engage with the market in order to make your business successful. This means having a great pricing strategy to make sure your products or services have the best possible price to attract the right customers

One pricing strategy that many businesses use is market pricing. It’s one of the most widely used strategies to get your products and services priced correctly. 

In this blog, we explore what market pricing is, how it’s applied, how it’s arrived at, and what it can tell you about your business. 

Market pricing definition

In its most basic form, market pricing is the act of setting the price of a product or service according to the market price. The market price is the current average price at which an asset or service can be bought from retailers by customers. The market price is determined by the basic rule of supply and demand. The point at which quantity supplied equals quantity demanded is called the market price. 

The market price is often used to determine consumer surplus. Consumer surplus is the maximum price a customer is willing to pay for a good or service as opposed to the price they actually pay, which is the market price. 

What can affect market price?

Since market prices are determined solely by supply and demand, any shocks to either of these will send the market price of a product or service up or down, depending on the situation. 

A supply shock is a sudden shortage or surplus of a product or service. This can be caused by any number of factors, including droughts, industrial action, scarcity, technological innovation, tax cuts, government subsidies, and more. 

A demand shock usually occurs when the consumer is less willing to buy the products or services in question. Causes for demand shocks could include rises in prices, political instability, natural disasters, and economic crashes. 

Products and services vs financial markets

Market price can apply to securities on financial markets as well as normal products and services. Market prices change as buyers and sellers bid differently to complete a trade.

The market price results from traders, dealers, and investors interacting with each other in the stock market. For a trade to happen, a buyer and a seller must meet at the same price. However, bids can be made for a price higher than that advertised. Offers can also be made by sellers below the advertised price.

What is a market-based pricing strategy?

A market-based pricing strategy is when prices for products and services are set based on market prices. Many companies use market pricing strategies to make a product more appealing after an initial launch when they can lower the prices to make their products more appealing to customers.

Creating a market-based pricing strategy relies on knowing the market and the other products and services you’re competing with. You can then choose to price your products or services higher, lower, or the same, depending on where you see yourself fitting into the market. 

Market-based pricing is especially useful for companies offering products that are first to market. Once the penetration strategy has been achieved and the company is the sole producer of the product in question, competitors are bound to arise. After this happens, prices will need to be adjusted based on the market price in order to compete. 

How to determine market-based pricing

You can determine the market price for your product by taking the cost of your product, adding the market factor price along with any premium you feel the product deserves.

Market based pricing = cost of product + factor cost + premium

The factor cost is the overall cost of investment it took a company to produce a product. 

You can also simply determine your market-based pricing strategy by reviewing your competitors' pricing and making a judgement about where in the market your product or service is likely to fit. 

Other things to consider when determining the market price for your product are:

  • Cost of the materials used in production
  • Cost of the production itself
  • Fees for shipping and packaging
  • Cost of shipping and handling
  • Customer service
  • Labour

Customer perception

Using a market-based pricing strategy will affect how your customers will perceive both your company and your products. The price you set sends a message to your customers about the kind of company you want to be. Do you want to be a prestige brand? Or do you want to be a budget brand?

For instance, let’s say you have a product that’s comparable in terms of quality. However, because of your unique production process, you’re able to offer your product at nearly half the price. While this will be great for attracting the kinds of customers who want the same product for less money, it may also send a signal, no matter how inaccurate, that your product may be of significantly lower quality than others. This may affect the volume of customers you get and the type of people who buy from you. 

Manage all your prices from your POS

Setting your prices can be one of the most important things you do in your business. Get it right and you can reap massive rewards. Get it wrong and you can alienate the very people you want to attract. 

As a business owner, you already have so much on your plate. So wouldn’t it be great if you manage everything business and pricing related right from your point of sale system?

When you purchase a Retail or Hospitality POS system, you get access to loads of great tools and apps, including popular financial apps like Xero, Sage, and Quickbooks

  • Track single item performance so you can forecast with accuracy
  • Receive stock alerts so you never miss a selling opportunity
  • Easily add, edit and bundle items to create new revenue opportunities
  • Create automatic purchase orders so you never run out of stock
  • Full barcode management. Import, update and manage 1,000s of products
  • Customize your reports to see what matters to you​
  • Access reports and data from anywhere​
  • Track sales, profit, and trends in real-time to understand more about your business​
  • Identify your top-performing products and staff members

Contact Epos Now today to learn more about our systems. 

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