A pricing strategy in which a business sets the price of its product and service offerings to be the same as the market leader’s. A follow-the-leader pricing strategy can entail either raising or lowering the price. The market leader may choose to counter this strategy by continually raising and lowering prices to make matching difficult.
This type of pricing strategy does not work for businesses of all sizes. For example, a small business lowering its prices to the same level as a high volume retailer will have a more difficult time competing because larger retailers purchase inventory more cheaply by buying in bulk and typically will maintain higher margins. In this case, the small business may set an unsustainable price that could at best sap resources and at worse put it out of business.
What does this mean for you? This strategy is one that is very common in many industries. But being lead around by the nose like a dog does not seem like the best approach. Further, losing control of your margins doesn’t seem like a smart idea either.
If you are trapped in this cycle, you need to get off the roller coaster now. You need to communicate a new message to your customers. You need to let them know that your prices are based on the value proposition that you are offering. Additionally, if you lower or raise your prices, it is be accompanied by a reduction or increase in the value to include in your value proposition. This message must be made clear. Why? Because if you lower your prices without reducing the value proposition, you are actually telling the customer that your product wasn’t worth that price. That is not the message your want them to get. You want them understand that your product or service has value and its worth it. If you can communicate this message, when you do raise or lower your prices, you will be able to maintain your margins as you will adjust the value proposition accordingly.