Market led pricing

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Market led pricing

What is the meaning / definition of Market Led Pricing in the hospitality industry?

The term Market Led Pricing refers to a pricing strategy, that orients itself upon the current market conditions, such being competition, consumer needs etc. Market led pricing is also known as a competition-based strategy, market-oriented pricing compares similar products being offered on the market. Then, the seller sets the price higher or lower than their competitors depending on how well their own product matches up.A market-based pricing strategy is also known as a competition-based strategy. In this pricing strategy, the company will evaluate the prices of similar products that are on the market. It is important to only consider those products that are similar to the product being offered. Depending on if the product has more or less features than the competition, the company sets the price higher or lower than the competitor pricing.

For example, if this product has an extra feature over the competitor’s product, the company could either decide to price it the same, therefore making it the better value or could price it slightly higher to account for the additional feature.

Many companies that launch a product into a specific market will price their products around prices of other products currently released. Although this kind of pricing may work for some companies, it isn't optimised and could be improved.

The term competition based pricing, also known as competitive pricing refers to the process of a company pricing its product/ service (in hotels rooms, food & beverages) according to the competitors.

Therefore, this rather happens with commodities or products that have less "status" differentiation. In the luxury hotel market for example, competition based pricing may actually hurt the hotel in the long-term as their clientele actually chooses for them due to their price being related to their exceptional offerings.

On the other hand, Budget hotels & hostels deal with price sensitive clientele whereby the price stands in the foreground. These establishments are able to increase demand easily by lowering their price as customers are "hunting" for bargains. Therefore, within highly competitive cities budget hotels are constantly orienting themselves on their competitors. This drives down prices, in favour of the consumer.

Competition based pricing comes with advantages and disadvantages for companies, following this pricing strategy.

Advantages:

It avoids price competing on prices lower than competitors

It is able to drive business in times where "some" business is better than "none"

Disadvantages:

May harm brand image

May lead to losses, due to not focussing on covering the overhead costs and increasing margins.

Price reduction will automatically increase demand if product is not up to par.

May get you distracted from other business tasks

It doesn't work in all markets

It's difficult for small businesses, as larger companies are more capable of reducing cost per customer.

By analysing the competitors products/ services, evaluating there values and there respective price, one can determine which price to offer ones one products/ services in order to compete.

One way of easily creating a price for a product/ service equivalent or highly similar to the competitors is by taking all competitors prices into consideration, adding these together and then dividing it by the number of competitors, this will result in an average price that is able to compete with the other products.

An example for this:

The 3 hotels in your city which are operating in the budget hotel market are offering the following three rates: €50, €60, €70 for a room/night. Adding all together you devide €180 by the number of hotels (3). Now with a price of 60€ you will have a price that represents the average in your city, making you neither the cheapest nor the most expensive.

This of course is the simplest way and in real-life pricing there are many more considerations to make in order to create a pricing strategy that will make a difference for your business.

See also:

Synonyms: Market based pricing, Competition based pricing, Competitive pricing

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