This pricing method focuses on information from the market rather than production costs (cost-plus pricing) and product's perceived value (value-based pricing).
The price of competing products is used a benchmark. The business may sell its product at a price above or below such benchmark. Setting a price above the benchmark will result in higher profit per unit but might result in less units sold as customers would prefer products with lower prices.
On the other hand, setting a price below the benchmark might result in more units sold but will cause less profit per unit.
In a perfectly competitive market, sellers almost have no control over prices. It is solely determined by the supply and demand, and products are sold at the market price or going rate.
Advantages and Disadvantages of Competition-Based Pricing
One of the advantages of competition-based pricing is that no complex computations are required. Sellers simply follow a market price, or a price set by market leaders. Also, in a highly competitive market, the burden of price-based marketing is lifted. However, other forms or marketing efforts might be needed.
When sellers adopt the same price as those charged by competitors, certain marketing efforts must be made to attract sales since price is not a major factor; it is neither an advantage nor a disadvantage. Additional efforts include aggressive advertising, better customer support, market saturation, etc.