Clearly, what competitors are doing cannot be ignored when setting prices. For example, a company with a small share of the market will probably find the general price level already set for him. This does not of course rule out the possibility of finding a differential advantage, which will enable a price well above the general level to be charged, especially if only a small segment of the market is being attacked. For example, the fact that ball-point pens are widely available for a few dollars does not prevent Parker's doing good business with very expensive (and top quality) pens for the gift market.
Very often it will be wise to accept competitive prices as the starting point for any development of a marketing strategy. It does assume, however, and possibly wrongly, that competitors have got their sums right. Against this, in an established market consumers will probably have come to accept this level as the 'going rate', and will need a lot of convincing if they are to accept something different. Traditionally the concept of the 'just price' has been talked of in some quarters. This was supposed to be the price acceptable to both buyers and sellers. Normally, of course, this will be the price level that has obtained in the market over recent times â€“in other words, what the major competitors in the field are currently charging.
Where the 'going rate' is set in this way by competitors, it is often useful to do backward costing, i.e. start with the price at which the product must be sold and then work backwards to the price at which it has to be produced if profit targets are to be met.
The term competitive pricing is sometimes used to describe a price-setting policy where the 'going rate' set by competitors is used as a reference point. A price may be set 'in line with' the competitor's price or 'higher than' or 'lower than' the competitor's price, perhaps on the basis that we wish our product to be perceived as 'better than' or 'cheaper than' the already established competitive product.