“The market sets the price!” We have all heard that statement and many treat it as axiomatic. After all, there are limits to prices on every product or service, and you can’t “charge more than the market will bear”. So I am not terribly surprised when someone tells me their strategy is to match the market prices. However, I am also quick to tell them “The market sets the price” is not a strategy. Taking that approach is really a choice to not think much about prices, and let competitors and customers lead you.
If the market sets the price, how does that happen? Is there some wizard hiding behind a curtain determining what the prices ought to be? Or is there some giant computer somewhere figuring out the answer to what the right prices are? Of course, neither of those things are true.
The market includes your company, your competitors, existing customers and potential customers. How does that market set a price? Do your competitors know something you don’t know that enables them to set a price? If not, how do they do it? And if you are simply reacting to prices your competitors set, then the market isn’t setting the price, your competitors are.
Let’s consider a case where your competitors are also saying, “The market sets the price.” Those competitors are paying attention to your prices. If you try to offer a price just below a competitor in order to win business, the competitor may take that as a signal of changes in market prices and begin to lower their own prices. When each competitor is setting prices based on what other competitors do, it can be fairly easy for prices to begin spiraling down, depressing each company’s margins.
Perhaps it is customers who set the price in a market. Clearly there is a point at which a customer decides the product or service is not worth buying. But if they can buy the product or service for much less than it is worth to them, they will pay as little as they can. Customers are also not homogeneous, and the value to each customer can be different. And customers can only determine what that point is by having a sense of how the product or service helps them or solves a particular need. So the way you explain to potential customers how your product or service helps them is likely to affect their perception of its value.
What all this means is that the market is not some monolithic entity, it is really the result of the interplay among many buyers and sellers. Each action taken by a competitor influences future actions. Since competitors may value products differently and have varying abilities and incentives to negotiate with sellers, there is nearly always a range of prices paid. Therefore smart companies don’t take a passive approach, they develop pricing strategies to influence the market.
Real pricing strategies include segmenting the market into groups of customers for whom the value is likely to be the same. They also include communicating the value story vis-à-vis other products in their offering and a customer’s alternatives, determining and communicating how complementary products affect the value equation, creating incentives to buy more, and determining how all of these choices will affect their brand image. Real pricing strategies are proactive and recognize how they are likely to affect competitive and customer actions in the future.
I am not suggesting that any company is immune to the other forces in the market. However, I do think simply saying “the market sets the price” is taking a victim approach. Don’t be a victim. Be proactive and set pricing strategies that reflect your value and influence the market in a way that enables success for the long term.