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What Is Price Benchmarking?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 November 2016
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    Conjecture Corporation
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Price benchmarking is one of several processes that are used by companies to develop an understanding of what type of rates or prices can be charged for goods and services, while still remaining at or near what has been identified as the standard pricing for those types of products. The idea with this type of strategic benchmarking is to not only have a grasp of what consumers are normally willing to pay for the products, but also what leading companies within the industry are able to charge for those products. Along with exploring the actual standards in terms of the purchase price, price benchmarking also involves identifying all the reasons and rationales behind the price, including the costs of production and other expenses incurred by the industry leaders.

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The ultimate goal of any price benchmarking is to make sure the pricing structure used by a particular company is in line with the structures employed by others in the industry, especially those competitors who are widely considered to be industry leaders. In order to accomplish this, time and effort spent in not only identifying the actual pricing used by those companies but also the reason why those rates are at those current levels is very important. Most companies set pricing based on a combination of expenses incurred during production plus the rates that consumers are willing to pay for the finished goods and services. By looking closely at the reasons behind the current price benchmarking within an industry, business owners may be able to identify ways to add value and entice consumers to pay a little more in order to get the extras. Alternatively, they may discover how to produce similar quality goods with less expense, making it easier to set prices that are below the industry benchmark.

Evaluating the price benchmarking or standards within an industry calls for identifying which companies are considered leaders within that industry. This is usually done by singling out companies that have been in business longer than most of the other industry participants, have a significantly larger market share than others, and have a name that is both well known and respected among consumers. For the most part, these companies tend to have enough influence to set the standards for pricing of goods and services, and maintain that influence because consumers feel the price is in line with the quality. When and as a competitor finds a way to produce the same type of good for a lower cost, this makes it possible to generate more profit from each unit sold. Even if the total sales volume never comes to rival that of the industry leader, choosing to sell the products at a price that is near but still competitive with that leader is likely to generate a steady flow of profits that can sustain the company for a number of years.

Engaging in price benchmarking on an ongoing basis is very important, since prices can and do change over time. Changes may be necessary due to shifts in consumer tastes, trends within the economy that either increase or decrease disposable income for consumers, and even the cost of the raw materials used to produce goods and services. By taking the time to use price benchmarking to make sure the costs to consumers remains at or near the industry standard, a company can minimize losses of revenue due to adverse shifts in the marketplace, while also taking advantage of trends that would justify a price increase and allow the company to make more profit per unit sold.

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