What Is Follow-The-Leader Pricing?

Follow-the-leader pricing is a competitive pricing strategy, in which a business matches the prices and services of the market leader.

Understanding Follow-The-Leader Pricing

Follow-the-leader pricing may force the business to continually adjust its pricing, especially if the market leader counters this strategy by continually raising and lowering prices. This can lead to price wars.

Follow-the-leader pricing works best for companies that have hit economies of scale and less beneficial for smaller businesses with thinner margins.

Special Considerations

A follow the leader pricing strategy is most suitable for larger companies with the economies of scale to achieve low unit costs and compete on price—and is commonly found in oligopolistic sectors, in which the market is shared by a small number of producers or sellers, such as big-box retailers or grocery chains.

Because small businesses and start-ups typically have higher costs and lower margins than bigger businesses they may not be to compete with the industry leaders on price. Instead, they have to use service and other offerings to differentiate themselves. Follow-the-leader pricing is an alternative to more strategic pricing strategies for entering new markets, increasing market share, or defending markets from new entrants.

Key Takeaways

  • The follow-the-leader pricing strategy involves matching the prices of the market leader.
  • The strategy can lead to price wars if the market leader decides to counter with price increases or cuts.
  • Follow-the-leader pricing is often used in oligopolistic sectors where few companies operate, such as grocers.