Market Based Pricing: Definition, Advantages & Disadvantages

No doubt, offering fair pay is important for attracting and keeping employees. A 2025 report says 51% of U.S. workers are looking for new jobs, and pay and benefits are big reasons why. Organizations use different ways to set salaries, and one common method is market based pricing.

In HR, market-based pricing helps companies stay competitive. But what exactly is it, and what are its other benefits and downsides? This guide explains everything you need to know about market pricing and introduces a reliable tool for salary benchmarking.

What is a market-based pricing in HR?

Market-based pricing refers to a compensation strategy that sets compensation levels (salaries, wages, and benefits) for specific jobs based on the prevailing rates for similar roles in the external labor market.

For example, a company wants to determine the right salary for a software engineer. They research what similar companies pay in the same industry and location using salary surveys, online databases, or compensation tools that analyze market data.

Don't confuse market pricing in sales, which involves formulas, market dynamics, production costs, and market-oriented pricing based on supply, demand, costs, and competition. In HR, it is used when:

• Offering competitive pay to attract and retain employees.

• Aligning salaries with market rates to ensure fair pay.

• Managing labor costs by setting realistic salary budgets.

• Using market data to create salary ranges and pay levels.

• Making fair and competitive job offers based on market pay.

• Following wage laws that apply to certain jobs or regions.

The right tool for market based pricing

More companies are using technology for compensation benchmarking. A recent report says organizations are investing more in compensation strategies and using specialized software to improve their processes.

Salary.com is a top compensation software provider used across industries for market pricing and pay analysis. Its market pricing feature makes the compensation process easier and provides key insights to help organizations stay competitive.

Here are the key features of Salary.com's Compensation Software:

• Market pricing is made easy by allowing companies to match and price jobs quickly and accurately.

• Streamlined market composites enable organizations to use data from the tool's Market Data, Salary.com surveys, or third-party sources.

• AI-driven job matches and automated scopes make comparisons easier.

• Pricing factors can be adjusted based on skills, certifications, and education.

• Pay markets can be established based on industry, location, and company size.

• Multiple scopes can be assigned per pay market for refined, competitive pricing.

• Aging factors help keep data current with assigned effective dates.

• Pay markets can be applied to departments, job families, or composites.

• Proactive insights provide real-time alerts to identify pricing concerns and data anomalies.

• An intuitive dashboard tracks job pricing status.

• A complete market analysis offers a visual view of external and internal data to ensure pay equity across the organization.

Market-based pricing: advantages and disadvantages

Market-based pricing has several benefits, but it also comes with some drawbacks to consider. Here are some of them:

Advantages of market-based pricing

• Attracts and retains employees: Offering competitive salaries helps companies hire skilled workers and reduce turnover. One study found that most companies use market-based pay to stay competitive.

• Ensures fair and transparent pay: Using market data for pay helps keep salaries fair and clear. It prevents random pay decisions and matches salaries with industry standards, thus building employee trust.

• Adapts to market changes: Market-based pay lets companies adjust salaries based on market trends to stay competitive. A study found that 70% of companies regularly update their salary ranges to reflect current market conditions.

Disadvantages of market-based pricing

• Overlooks internal equity: Basing pay only on market data can create unfair salary gaps in a company. Experts believe this market based approach may ignore fairness within the company, which leads to pay differences and unhappy employees.

• Depends on market data: The effectiveness of this pay structure depends on having up-to-date and precise market information. Outdated or incorrect data can result in inappropriate salaries.

• Causes frequent salary adjustments: As market conditions change, companies may need to adjust salaries often, which can be administratively challenging and may cause uncertainty among employees.

Steps for building a market-based pay structure

As organizations recognize the benefits of market pricing, creating a pay structure from it is important for maintaining competitive and fair compensation.

Here's how to build an effective market-based pay structure.

1. Set goals and choose jobs to compare: Define the company’s pay strategy and decide whether salaries will match, lead, or lag the market. Use Compensation Software’s job matching tool to find benchmark jobs for accurate market comparisons.

2. Collect and study pay data: Access real-time salary surveys through compensation software to gather market pay data. Filter results based on industry, location, and company size to compare salaries accurately and understand competitive pay trends.

3. Create pay grades and ranges: Develop salary bands that include a minimum, midpoint, and maximum pay level for each job. Salary.com's Compensation Software makes it easy for HR professionals to build a new salary structure with its drag-and-drop feature.

4. Check fairness: Use the pay equity analytics to identify salary gaps, pay compression, or inconsistencies. Generate reports to ensure fair pay across employees and maintain compliance with pay transparency regulations.

5. Share and apply the pay plan: Communicate the pay structure to managers and employees. Provide training on how salaries are set, how pay decisions are made, and how employees can grow within their pay range.

6. Review and update: Regularly check market pay trends and adjust salary ranges as needed. Update pay structures to stay competitive and ensure fair compensation as the job market changes.

FAQs

Here are some common questions about market based pricing:

What is an example of market-based pricing?

Here's an example of market pricing in HR: Let's say a manufacturing company in Detroit is hiring a production manager. The HR team researches local salaries using industry surveys, job postings, and online databases. If they find the typical salary range is $70,000 to $100,000, they may offer $85,000 to attract qualified candidates.

What is the difference between job evaluation and market pricing?

The difference between job evaluation and market pricing is that job evaluation ranks jobs internally based on skills, effort, and responsibility to ensure fairness, while market pricing sets salaries based on industry rates to stay competitive. However, both help organizations develop fair and competitive pay structures that align with business goals and talent strategies.

What are the advantages of market-based pricing?

As mentioned above, the advantages of market pricing for organizations include attracting and retaining employees, ensuring external competitiveness in pay, and adapting to changes in the labor market.

What is a market-based pricing strategy?

A market pricing strategy is a plan that sets salaries based on pay rates for similar jobs in the labor market. As one of the key pricing strategies, it relies on salary surveys and industry data to create competitive pay ranges, which helps organizations attract and retain talent.

Remember, do not confuse it with market pricing in sales or marketing, which talks about pricing models, customer willingness, price sensitivity, cost-based pricing, value-based pricing, cost-plus pricing, customer expectations, and perceived value. In HR, market pricing focuses on compensation, using comprehensive market research to align salaries with industry trends.