You don't have to be the biggest competitor to be a price leader.Whilst leadership in pricing includes the obvious decision of when to increase or decrease prices, it also includes the structure of your market price model, the framework of price differentiation between segments and customers, and your innovative pricing process.
Starbucks started at a single location offering premium dark-roasted coffee and premium service at premium prices. There were other places at which customers could buy reasonable coffee at much lower prices, but Starbucks demonstrated customers would pay more for a compelling value proposition.
Uber is another example. When they started, they were much smaller than traditional yellow taxi companies, and they offered prices that were often lower than their competitors.
However, Uber was the first to use surge pricing which raised their prices above taxis during peak periods. Customers were willing to pay because surge pricing greatly increased the odds they would get a taxi during those periods. In this case, Uber led the way in both price levels and price structure.
Airlines have often been innovative when it comes to pricing, particularly startup airlines. Initially, startup airlines were simply low-price competitors but in recent years they have offered price leadership in the way of a la carte pricing.
Airlines use a pricing structure that offers something to the most price-sensitive customers without lowering all their prices.
So there is a very low price available for the customer who only wants a seat, does not need to check in a bag or store one overhead, does not mind a middle seat, does not mind boarding last, and does not want anything to eat/drink.
By not providing those things, airlines keep their cost structure low. For customers who want some of those other things, the prices are higher.
Another example of price leadership comes from T-Mobile. T-Mobile just offered lower prices but recently have changed their offering to include unlimited data. This new plan targeted segments of data-hungry customers and those who were afraid they might use too much data and receive huge bills.
They have been very successful in luring customers away from the largest competitors, and now all carriers have an unlimited data option. The point here is that a smaller competitor was able to lead the market with a new pricing structure.
What you need to be a price leader
So, you do not have to be the largest player in the market to be a price leader, but there are some conditions that must be in place to become a price leader.
You must have a unique value proposition (UVP) that you can easily articulate to potential customers.
When you can explain to customers how you are different and how you add value you can offer a price or price structure that aligns with that value. If you can't prove that difference, there is no reason for customers to buy from you with higher or different prices. When you can describe your value to customers, align your prices with that value.
"Pricing is actually pretty simple ..... customers will not pay literally
a penny more than the true value of the product." Ron Johnson
Your customers must be happy with your service.
If your customers are unhappy, small changes can cause them to look elsewhere. Airlines may be the exception to this rule. The low budget Easyjet and Ryan Air continue to be popular despite customer satisfaction being low.
Don't get greedy.
Even if you have an excellent value proposition and outstanding service, there is a point at which customers will still object to price hikes. During the past 2 years, many pharmaceutical companies in the USA have increased their prices too quickly: customers have been outraged and have actively looked for alternatives.
Monitor your customer results and competitor reactions when you make a change to your prices.
Competitors often follow when a market player makes a move and experiences some customer success, but not always. If your results from a price change are poor, reverse the change and regroup. You will still have learned valuable lessons in your attempt.
There is money to be made by leading the market or a segment of the market with your prices, but you won't get there unless you give it a try.
Related Posts
10 Pricing Techniques to Keep a Buyer's Attention
What are The Most Popular Pricing Strategies by Industry Sector?
Sources
http://info.stratpricing.com/blog/how-to-be-price-leader Scott Francis March 2017
Pricing Strategy: Setting price levels, managing price discounts and establishing price structures, Tim Smith 2011