Market Prices are Set by the Lowest-Cost Competitor

For products that are commodities or "quasi-commodities," the market price is not determined by a company's own internal costs. Instead, it is dictated by two external factors:

The cost structure of the lowest-cost competitor.
That competitor's willingness to operate at certain margin levels.

The Implication for Strategy:

An inexperienced marketing person often makes the mistake of thinking their own costs are the primary factor in pricing. They are not. Your internal costs only determine your willingness to compete at the market price. They do not set the market price itself.

This means that to compete effectively in a commodity or quasi-commodity market, a company must have a cost structure that is competitive with the market leader. If your costs are significantly higher than the lowest-cost producer, you will be faced with a choice:

Meet the market price and accept unsustainable, low margins.
Attempt to price above the market and lose business.

Analyzing internal costs alone is insufficient for pricing decisions. You must have a deep understanding of your competitors' cost structures and margin objectives, as they are the ones who will ultimately set the price in the market.