Market-based pricing advantages and disadvantages
Market-based pricing is pretty self explanatory. There is no reference to the customer whatsoever. You are making a pricing decision based on your competitors, and how saturated the market is. At what point do you stop and think about the customer and actual market-based pricing advantages and disadvantages?
Advantages of market-based pricing
A market-based pricing strategy can be effective, so long as what you’re selling is congruent with what your competitor is selling. Obviously, if that industry is particularly saturated, market-based pricing is likely to give you an accurate pricing point that will allow you to remain competitive. But you will need to focus on adding superior value compared to your competitors.
It’s also fairly low risk. If you have a solid grasp on your product’s quality, target audience, and cost, this method will most likely not lead to bankruptcy. If it's working for your competitors, it can similarly work for you. Competition-based pricing takes a very similar approach.
Disadvantages of market-based pricing
Replicating your competitor’s pricing is a lot like copying your neighbor in class. If they make a mistake in their pricing, it’s rather likely you will too. Competitor pricing has a certain stability toward it, but it’s extremely local and can lead to short-term thinking, as well as plenty of lost opportunities when it comes to expanding your customer base. If you mirror your competitor’s pricing, you’re also likely to acquire the same customer base, rather than create your own.
Another negative, and crucial one, is that you’re not thinking about the customer. Your end user should be considered from the very beginning. If you don’t understand your ideal customer, you’re leaving money on the table.