Trusight Inc.

What is "Market" Pricing?

9/6/2011By George B. Gmach

What is “market” when we are talking about market pricing? Most of us think of market as willing buyers and willing sellers exchanging goods and services using cash or bartering. Most of us can relate to gas prices, where prices are very transparent and transactions are easily shifted from one supplier to another because the quality is consistent and it is hard to differentiate between suppliers. Any retailer who departs significantly would lose sales or profit.

Labor pricing is anything but transparent. Even in cases where rates are public information, there is significant effort involved with gathering and digesting salary information from multiple employers with differing situations and practices. A difference of 100% between some of the lowest and highest paid individuals in a job class is not unusual.There are five important summary numbers used to describe market for any given job.

• Quartile 1 -- 25% of employees are paid at or below this amount;
• Median or Quartile 2 -- is the middle rate of pay with half paid above and half paid below;
• Quartile 3 --75% of employees are paid at or below this amount;
• Weighted Average -- the simple average of employees gives more weight to large employers with multiple employees in a job;
• Unweighted Average -- the simple average of what employers pay gives equal value to large and small employers and focuses on what most employers are paying.

Any great variation among the measures of central tendency (median, weighted average and unweighted average) tells us that there is an unusual feature to the market information being summarized. Usually this is the result of data from one or more large employers pulling the data summary up or down towards their average rate. Without these five important numbers it is hard to gain insight into what might be an actual middle market value. Simply knowing that there is variation in the data might lead us to seek additional supporting survey sources so that we can make informed interpretations of what is being presented.

When Trusight prices jobs, we look for multiple survey resources from organizations that we know are following sound practices when they gather and summarize data. If one survey has some unusual patterns in their data for a given job, other sources might provide comparative data to support a middle market measurement that we can choose with greater confidence. Overpaying or underpaying can both have significant impacts on sustainability of an organization’s business plan. Sound market pricing can reduce the risk of either pay practice extreme.

For information on market pricing projects large or small, contact Wendie Lindberg at [email protected] or 763-253-9721 or Linda Jancaric at [email protected] or 763-253-9195.