Competition-based pricing of Services | Approaches | Problems

Competition based pricing of services

Prices charged by different firms in the same market is the main focus of Competition-based pricing. This approach is commonly used in two situations:

  1. When services are standard across providers.
  2. In oligopolies where there are a few large service providers such as the airline industry.

The strength of competition in the market influences a service organization’s discretion over its prices. The price discretion is generally limited where there is little differentiation between service products and competition-based pricing is inevitable in such situations which results is price uniformity.

Approaches under competition-based pricing

In a market where a number of service firms offer similar services, a competitor’s price serves as the reference point. Premium pricing means pricing above the level adopted by competitors. On the contrary, discount pricing means pricing below such level. But parity pricing or going rate pricing involves charging the most prevalent price in the market. Parity pricing is appropriate under following situations.

  1. When the supply more than demand
  2. When the market remains competitive in stable manner
  3. When channel and consumers are aware of their choices; and
  4. where the market leader has established a market price.

Small firms in the industry have to go in for parity pricing. However, the competition-based pricing suffers from the following problems:

Problems of Competition-based Pricing:

1. It does not consider the cost structure and demand level for the service.

2. Small firms may charge very low price. As a result, the margin available to them is just sufficient to remain in the business.

3. Competition-based pricing is not appropriate where there is heterogeneity of services offered by the service providers. Only in standardized services, such as dry cleaning, prices are compared.