Follow-the-Leader Pricing
What Is Follow-the-Leader Pricing?
Follow-the-leader pricing is a competitive pricing strategy where a business matches the prices and services of the market leader. That is, a company will follow the pricing of the biggest player in the industry. For instance, when the market leader lowers the price of its goods, the company will lower its price to a similar level.
Understanding Follow-The-Leader Pricing
Follow-the-leader pricing might force the business to ceaselessly change its pricing, especially assuming the market leader counters this strategy by consistently raising and lowering prices. Be that as it may, this can lead to price wars.
Price wars happen when companies intentionally undercut one another. For instance, when one company lowers its price to meet the loss leader, the market leader might further cut its prices to keep or gain more market share. This can occur for an extended period, spiraling into a price war. Major instances of price wars have been with Apple and Samsung and Walmart and Amazon.
Special Considerations
A follow-the-leader pricing strategy is generally suitable for bigger companies with the economies of scale to accomplish low unit costs and contend on price. It is normally found in oligopolistic sectors, in which the market is shared by a small number of producers or merchants, for example, big-box retailers or staple chains.
Since small businesses and new companies regularly have higher costs and lower margins than bigger businesses they may not be to contend with the industry leaders on price. All things being equal, they need to utilize service and other offerings to separate themselves. Follow-the-leader pricing is an alternative to more strategic pricing strategies for entering new markets, expanding market share, or protecting markets from new participants.
Follow-the-leader pricing is maybe most obvious in retail, where many major retailers — like Target and Walmart — are pricing match numerous product prices from market leader Amazon.
Types of Follow-the-Leader Pricing
Follow-the-leader pricing is a contender based pricing strategy. This is not normal for cost-based, customer-based, or product-based pricing. Cost-based pricing utilizes the cost to make the product as the bellwether for pricing. From that point a company will add an ideal margin or profit to the price.
Customer-based pricing incorporates mental pricing, where a company will price appeal a customer's mind. That is, the product will be priced to seem less expensive than it truly is, for example, $99.99 versus $100. Product-based pricing will be pricing a product in light of a bundle or hostage products, among others. Hostage product pricing includes pricing a product (like extremely sharp edges) in light of its dependence on being utilized with the primary product, (for example, a razor handle).
Follow-the-Leader versus Loss Leader Pricing
Among contender based pricing strategies is follow-the-leader pricing and loss leader pricing, as well as going rate pricing. Going rate pricing includes pricing a product in light of its direct rivals.
Loss leader pricing includes selling a product at a low cost, normally at a loss, to gain market share. Stores might utilize loss leader pricing for certain products around special times of year to get customers to visit its stores, with the hope they'll likewise purchase higher-margin products.
Features
- Follow-the-leader pricing is frequently utilized in oligopolistic sectors where barely any companies operate, like food merchants.
- Follow-the-leader pricing is a contender based pricing strategy — where other strategies incorporate pricing in view of costs or the customer.
- The follow-the-leader pricing strategy includes matching the prices of the market leader.
- The strategy can lead to price wars on the off chance that the market leader chooses to counter with price increments or cuts.
