What Is Follow-the-Leader Pricing?
Follow-the-leader pricing is a competitive pricing method where a business suits the prices and services and products of {the marketplace} leader. That is, a company will persist with the pricing of crucial player inside the trade. For example, when {the marketplace} leader lowers the price of its pieces, the company will lower its price to the an identical level. Â
Key Takeaways
- The follow-the-leader pricing method involves matching the prices of {the marketplace} leader.
- The process may end up in price wars if {the marketplace} leader makes a decision to counter with price will building up or cuts.
- Follow-the-leader pricing is steadily used in oligopolistic sectors where few companies carry out, corresponding to grocers.
- Follow-the-leader pricing is a competitor-based pricing method—where other strategies include pricing based on costs or the customer.Â
Understanding Follow-The-Leader Pricing
Follow-the-leader pricing would possibly pressure the business to time and again adjust its pricing, in particular if {the marketplace} leader counters this method by means of steadily raising and decreasing prices. Alternatively, this may end up in price wars.
Price wars happen when companies intentionally undercut each other. For example, when one company lowers its price to satisfy the loss leader, {the marketplace} leader would possibly further decrease its prices to stick or reach additional market percentage. It’ll happen for an extended period, spiraling proper right into a price war. Primary examples of price wars were with Apple and Samsung and Walmart and Amazon.Â
Explicit Issues
A follow-the-leader pricing method is most fitted for larger companies with the economies of scale to achieve low unit costs and compete on price. It is steadily found in oligopolistic sectors, all through which {the marketplace} is shared by means of a small number of producers or sellers, corresponding to big-box stores or grocery chains.
Because of small corporations and start-ups usually have better costs and reduce margins than better corporations they will not be to compete with the trade leaders on price. Instead, they have got to use supplier and other alternatives to tell apart themselves. Follow-the-leader pricing is an alternative to additional strategic pricing strategies for getting into new markets, increasing market percentage, or protective markets from new entrants.
Follow-the-leader pricing is in all probability most evident in retail, where many major stores—corresponding to Function and Walmart—are pricing have compatibility many product prices from market leader Amazon.
Varieties of Follow-the-Leader Pricing
Follow-the-leader pricing is a competitor-based pricing method. That’s not like cost-based, customer-based, or product-based pricing. Worth-based pricing uses the associated fee to create the product since the bellwether for pricing. From there a company will add a desired margin or get advantages to the associated fee.
Purchaser-based pricing accommodates psychological pricing, where a company will price appeal a customer’s psyche. That is, the product could be priced to appear more economical than it actually is, corresponding to $99.99 versus $100. Product-based pricing is pricing a product based on a package deal or captive-products, among others. Captive-product pricing involves pricing a product (corresponding to razor blades) based on its reliance on being used with the main product (corresponding to a razor handle).
Follow-the-Leader vs. Loss Leader Pricing
Among competitor-based pricing strategies is follow-the-leader pricing and loss leader pricing, along with going rate pricing. Going rate pricing involves pricing a product based on its direct festival.Â
Loss leader pricing involves selling a product for a low price, maximum ceaselessly at a loss, to reach market percentage. Shops would possibly use loss leader pricing for certain products around the holidays to get consumers to consult with its stores, with the hope they’ll moreover achieve higher-margin products.
