Market-Based Selling Price Formation

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Market-Based Selling Price Formation
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In some activities, especially in the retail trade, the products sold are the same among several competitors. It is therefore necessary that the sales price formation is made in a very dynamic way, especially considering what is being practiced by the competition and the general changes of the market.

What is Pricing and How to Calculate Selling Price?

See also: Complete Guide to Calculating Sales Price

What is Pricing?

The activity of pricing or pricing involves defining mathematical and also strategically, viable pricing and the method of charging for your products or services. In general, the issues involving pricing are fixed costs, variable costs, definition of contribution margin e point of equilibrium, competition analysis and positioning.

know more about what is the formation of sale price.

How to Price Market-Based

This is the type of pricing almost exclusively based on competitive intelligence information, but for everything to make sense, let's first remember the general structure of a well-made pricing:

  1. Cost Raising
  2. Point of Equilibrium Analysis
  3. Business Model Definition
  4. Competition Analysis
  5. Positioning and Strategy

When pricing according to the market, you will pretty much completely ignore the 3 first points, as they are very simple or irrelevant and focus deeply on the 4 point, taking into consideration the 5 point. In other words:

a) Your cost is standardized because you are usually reselling. Remembering that this is very common in retail trade, although it can also be seen in online services such as ticket sale area.

b) Your equilibrium point fluctuates a lot, as its price also varies with market changes.

c) Typically, this model only works with more traditional retail, not common in new business models.

d) Accompanying competition is the critical success factor.

e) Adjustments can be made according to positioning, but what will really dictate is the market.

Market-Based Selling Price Formation

Online Retail Case

Today, every major retailer also owns an e-commerce. In Brazil, this is well known with American stores, cold spot, Bahia homes among many others. In these cases, for example, the pricing of the products is done in a super dynamic way, taking into consideration, inventory and competitive price.

What is Pricing and How to Calculate Selling Price?

This works simply, there are services today like the Sieve, which monitor your competitors in real time, constantly mapping your websites, to help you give the best price in real time.

Another classic case of a service company is Uber with its dynamic tariff. The higher the demand for cars, the more expensive the race is.

Case of Physical Retail

Of course, physical retailing is much more difficult to track real-time competition pricing. Anyway, there are two well-known strategies you should know:

a) COVER THE COMPETITION!: This is a classic method of getting the customer to search the price of the competition. Thus, you make few sales at a price below yours, but you end up finding out in which products you have lost selling by price and fixing.

b) Hidden Customer / Market Research: These are classic services, usually offered by consultancies, that we actually send consultants to their clients to make an inventory and price list of their main products.

Problems in Shaping Your Price Based on Competition

Typically, companies that work with this type of market-based pricing work with many SKUs and also with considerable operating complexity. Therefore, it is important to be careful not to fall into some errors:

  1. Do not lock the minimum value. When the price is done automatically or dynamically, even if manual, you must set the minimum price acceptable for no loss. This prevents competing errors or manipulations from affecting you.
  2. Do not adjust according to your positioning. Although the most important is the market price, you should not rule out its positioning. That is, if you are seen as a premium company, you should always seek to sell 20% above the competition, you can not simply copy.
  3. Stop looking for differential. It can be tempting to be taking orders without seeking differentiation. But, as we said in the post pricing by value, it is essential to continue innovating to achieve higher margins.
  4. Just follow instead of being followed. Another factor that should be avoided is to guide all your decisions around the competition. If you do this, you will end up being led to paths that do not work for you and completely ignoring your particular growth strategy.
  5. Keep processes inefficient. The critical success factor of this pricing is to report quickly and reliably about the market. So if your process is bad, it should be changed immediately because your outcome will be affected whenever you get behind the competition.

Conclusion

Market-based price formation aims to maintain products that are identical at the same price level and, in a dynamic way, increase the competitiveness of the business. However, it poses significant operational challenges and must be used seriously. In case you want to deepen your price analyzes, be sure to test our spreadsheets for pricing.

What is Pricing and How to Calculate Selling Price?

Excel Spreadsheets

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