What is Market-Based Pricing Strategy? Definition & Examples

In this competitive industry, focusing on compensation strategy keeps employees motivated. To maintain this driving force in workers, one approach that provides competitiveness in employee salaries and benefits is the market-based pricing strategy.

To learn more about this method, read on as we discuss its definition and example, the advantages and disadvantages, some frequently asked questions, and how to create a market-based compensation structure.

What is the market pricing method?  

Market-based pricing, or market pricing, means establishing a price point for the same or similar product or service based on the offerings of competitors within the market. It is also known as competition-based pricing or market-oriented pricing.

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In relation to HR processes, market-based pricing means offering a salary rate and benefits to employees based on market research from similar jobs in the same industry, location, and qualifications. This encourages companies to come up with a competitive compensation package based on market conditions.

Setting prices that match the market dynamics is easier with Compensation Software's Market Data. This will help your employee compensation remain competitive with millions of salary data points encompassing unique job titles, industry averages, and various locations.

What is an example of market-based pricing?

The market-based approach in determining the employee's pay structure gives companies insights into the right salary range for every job position, potentially leading to attracting and retaining top talent. Here is a market-based pricing example in HR to give you an overview:

Company A needs a marketing leader who can boost their overall sales, attract the target market, and appeal to consumer demand. Upon researching the salary range of a marketing manager based on the current market rates, the company offered $118,000 to $133,235 for the position.

Market-based pricing advantages and disadvantages

Just like other strategies and pricing models in employee compensation, market pricing has its benefits and drawbacks. Here are some of them:

Advantages of market-based pricing

• Attracts a skilled workforce: Candidates with more competencies, higher education level, and advanced experience will get a higher salary for their roles. This means that the company can recruit top talent when the job offer is at par or at a slightly higher price than industry expectations.

• Boosts employee motivation: When employees know that they are paid fairly and competitively, they are more productive and perform well at work. For example, if employees work in customer service, they can enhance customer satisfaction and exceed customer expectations.

• Improves employee retention: Employees will stay in a company when their compensation has gone through deliberate planning and research. With market pricing, there are compensable market factors to consider when establishing the right price for a job.

Disadvantages of market-based pricing

• Irregular market data: Market data can vary depending on the completeness of information, fluctuations in the market, or inconsistencies in compensation surveys. This can lead to companies offering a higher or lower price, limiting the reliability of market-based pricing.

• Unmatched job salaries: If a company does not choose the most relevant market data and conduct proper job matching, there might be incompatibility between the pricing and the organizational roles and responsibilities, which defeats the purpose of an externally competitive salary.

• Neglect in internal equity: The value of each job position in an organization might be different from other companies, which means the standards set by the external market are not entirely a reflection of every organizational dynamic. Too much highlighting of market data can diminish the essence of internal pay equity.

Streamline your pricing process to prevent inconsistent market data and misaligned salaries through Market Data Scopes. This features relevant data that spans a wide array of job titles across geographical locations, industries and sub-industries, and company size and revenue.

How to create a market-based compensation structure

A compensation structure is an outline of salary and benefits an employee gets based on the job roles and responsibilities, experience, skills, and market conditions. In this article, we will focus on the influence of the job market in establishing this framework using the following steps:

1. Determine compensation philosophy

   The company’s pay philosophy is its approach to paying the workforce based on its business objectives, company values, and external market. For example, your company might focus on recruiting high-quality candidates by offering higher pay than the market.

2. Identify roles and responsibilities

   Outline the job positions in the company and specify their responsibilities, purpose, and qualifications like skills, experience, and education. Indicate where the role fits in with the organizational structure. This will make comparable job matching more accurate and efficient.

3. Gather market data

   Ensure that the sources used in market data are those relevant to the organization’s job title, industry, location, and company size. Some of the reliable sources of salary data are government sites, third-party custom surveys, and professional HR-reported findings.

4. Carry out salary benchmarking

   Utilize the outlined job description of each position in the company and look for benchmark jobs that match your organization’s job titles. Using multiple and reliable sources of market data, conduct job matching and aim for at least 70% alignment of job descriptions.

5. Establish salary grades and ranges

   You can now start building pay grades and ranges using the matched jobs between benchmarks and organizational roles. Let your pay philosophy guide you as external market does not always match internal equity.

   Assign pay ranges by using the minimum and maximum value of the data. Do this in each job position. Arrange salary grades from lower to higher pay rates. For example, senior-level employees will have a higher salary grade than entry-level employees.

6. Ensure compliance with law

   A market-based compensation structure is also subject to salary laws and regulations so keep an eye on important guidelines, such as the Fair Labor Standards Act, which states the minimum wage requirements for employees, and the Equal Pay Act, where employees must be compensated equally for equal work.

It is the process of determining the company’s pay philosophy, identifying job roles and responsibilities, gathering reliable market data, doing salary benchmarking, building pay grades and ranges, and ensuring law compliance.