In what ways does barometric price leadership differ from other price leadership models?
To be a price leader, a business must be in a position where it can determine the market price. Because of their position, they have a considerable impact on the current pricing of products and services. In other words, they have complete control over the pricing of their products and may move them in whatever way they want. Other market competitors are obligated to follow the price leader and set their rates in accordance with their dominating position. One of the three kinds of price leadership is barometric. The other two forms of pricing leadership are dominating and collusive.
The barometer of price is a reference to one of the industry’s leading companies. Or, for that matter, any updates to the product’s functionality. And that company continues to be the driving force behind the company’s transformations. So it is referred to as the industry barometer.
Pricing Model Based on Barometric Data
Using barometric price leadership, a company may predict the future direction of the price of a product and lead the market. This company does not have to be enormous in scale. There’s no limit to the size of a company’s barometer pricing power. Such companies have a keen eye and a sharp ability to predict the market’s price movements. Eventually, other players begin to follow the barometer price leader because they are confident in the price leader’s abilities and judgment over a period of time.
Competitors begin to believe that this company has access to information that they do not. This information enables the company to accurately predict the future direction of pricing. Furthermore, oligopolistic marketplaces are more likely to have such a leader. Only a few companies are in the running. In other words, those who don’t follow the barometer price leader’s advice risk losing market share to the leader.
Do you know how to implement Barometric Price Leadership?
Similar to a “barometer,” the barometric price leader measures the current market condition. It is adept at predicting how the price of a product or service will vary in the near future as a result of changes in market conditions, customer demand patterns, input material costs, or variations in the cost of production. These are some of the factors that may impact a product’s price. However, the real cause may be different.
It’s not as if the participants in the market aren’t able to see whether the present prices are rising or falling. The difference lies in the speed and accuracy of such forecasts when any of the following events occur. It’s also possible that some firms don’t invest enough time or money to keep an eye on changes in the market that might impact the pricing of their product or service. Alternatively, they might just follow the barometer price leader and adjust prices appropriately.
Barometric pricing leader might be a tiny participant in the market. Furthermore, it isn’t necessary to work with a low-cost business. As a result, he may only be able to hold the other participants to the market pricing of products and services for a short period of time. As a result, barometric price leadership may only last a few days or weeks.
Why is Barometric Price Leadership a successful strategy?
The effectiveness of barometer price leadership depends on a number of factors.
Relationships of goodwill
For barometric pricing leadership to thrive, there must be an atmosphere of mutual trust and respect in the market. The reason for this is that no business would accept another as a leader and follow it for long if there is a lot of competition in the industry.
In-house pricing department
A barometer price leader may have a staff committed to competitive intelligence, research, and analysis of the market. When necessary, the team adapts its pricing approach based on market conditions and other factors.
For this full-time crew, the price leader is always one step ahead of the competition when it comes to product pricing. As a result, smaller companies that lack a specialized pricing staff are unable to maintain their position as the market’s lowest-priced leader for long.
The cost of a product is not the only consideration when making a buying decision. Cutting costs and offering steep discounts isn’t enough to keep a company at the top of the market for long. Value and satisfaction should be provided to consumers via the company’s offerings. A company may maintain its position as the barometer pricing leader for a long time if it supplies customers with high-quality goods in a wide range of applications.
What are the drawbacks to Barometric’s price-setting role?
Additionally, barometric price leadership has its drawbacks. The following are some of them:
eradicating the opposition
In many cases, barometric price leadership annihilates smaller competitors. Their rate of reduction can’t keep up with the leaders for long. The barometer price leader, on the other hand, is generally a large company that benefits from economies of size and breadth. For example, this allows them to cut their prices while still making some money.
As a result, when the market leader uses a price lowering approach to enhance its market share, the smaller firms suffer greatly. They are unable to compete with the market leader’s price and are driven out of the market.
The premise that goods are homogenous is flawed
On the basis of this assumption, the theory of barometric price leadership asserts that the commodities and services offered by market participants are homogenous and comparable in character. The only thing that separates them is their cost. It’s based on the premise that people would purchase the cheapest items. However, this is a faulty assumption that is not always accurate.
Products and services are seldom identical in the real world. There is a distinct advantage to each product or service that other firms do not have. The primary service provided by an airline, for example, is air transportation. However, the quality of the service and facilities they give throughout the voyage might have a significant impact on their pricing. When it comes to flying, many people choose to travel with high-end airlines, thus the cost becomes less of a consideration.
In the market, both big and small firms may benefit from barometric price leadership as a marketing tactic. This is especially important for individuals who aspire to be the pricing leader in their industry. The greatest benefit of such pricing leadership is that it allows for the comparison of prices to be done by others. The barometer price leader should serve as a guide for smaller participants. Then they adjust their product or service price to reflect this. As a result, they don’t have to spend time and money doing significant market and price research.
However, following the barometer price leader requires extreme caution. The business model used by each operator is unique. As a result, companies shouldn’t simply follow the leader’s price decisions. It’s possible that the leader’s choice will be incorrect in certain cases. As a result, instead of following the barometer price leader blindly, every market player should do their own study and utilise their own judgment.
Meaning, assumption, benefits, and limitations of dominant price leadership
Definition, Benefits, Drawbacks, and Mechanism of Credit Default Swap
Downsizing? Tips for Choosing the Right Size of Property
The 5 Biggest Mistakes Tech Professionals Make in Financial Planning | Mistake #3