Analyse one reason why a business might use competitive pricing and not a cost-based pricing method for an existing product.

Reason for Using Competitive Pricing Over Cost-Based Pricing

One significant reason a business might opt for competitive pricing rather than cost-based pricing is market positioning and competitiveness. In highly competitive markets, businesses often face numerous competitors offering similar products. Setting prices based solely on cost may lead to higher prices than competitors, risking loss of market share.

Detailed Explanation

1. Market Dynamics: In industries where products are similar, customers gravitate towards the option that offers the best value for their money. If a business uses cost-based pricing, it may inadvertently calculate a price that is not aligned with what customers are willing to pay or what competitors charge.

2. Consumer Perception: Competitive pricing allows a business to evaluate and match or undercut competitor prices, which can improve the product's appeal in a crowded marketplace. Consumers often perceive price as a quality indicator; thus, a price point that competes with others can signal that they are getting a fair deal.

3. Flexibility in Response: Competitive pricing enables businesses to adjust their prices in response to competitor actions quickly. This adaptability can be crucial in a fast-paced market where price wars might occur or where competitors might frequently change their pricing strategies.

By adopting competitive pricing, a company not only reinforces its market presence but also enhances its ability to attract and retain customers, which is essential for overall business sustainability.