What is Competitive Pricing?

What is competitive pricing? 

Competitive pricing is a pricing formula in which prices are set based on your competitors set prices. This pricing method completely relies on competitors’ prices regardless of product value among customers or the production costs incurred in product creation. Strong competitive pricing models are reliant on market research. 

When you know the pricing of top market competitors and how their price aligns with customer preferences, it gets easier to determine prices of your own produced items. It is the complete opposite of other pricing strategies in which factors like consumer demand, cost of production, and other factors are considered. This kind of strategy completely depends on publicly available data and information about your competitors. 

When opting for a competitive pricing strategy, you price your products slightly below your competitor’s offerings. For instance, if you are selling 10 kilograms of tea and your competitor’s price is $50-$60 for that product, you will price your product somewhere around $55. Competitive pricing is a method of staying ahead of the curve and gaining a competitive edge over other market rivals. 

What are the 3 pricing alternatives of competitive pricing? 

There are 3 options for business owners when they are willing to implement competitive pricing. 

1. Premium Pricing Strategy 

In case you are setting the prices higher than your competitors, it is best to introduce new features in your product to justify the increasing price. Pricing above your competitors is sometimes possible owing to high price-quality association among potential customers. However, it is crucial to keep an eye out for online consumer reports and comparisons on the internet, as it can get complicated for you to justify prices to customers. 

2. Undercutting or Penetration Pricing Strategy 

Pricing your products just below your competitors relies on your company resources. If you can increase per-volume production without having to pay any extra costs, then it could be a favorable business strategy. However, there will always be a risk of a diminishing profit margin, and recovering sunk costs may not be easy; thus, it can risk your business. 

On the other hand, your lower-than-the-competitors’ prices can be used as a marketing trick. This can help increase traffic and potential buyers. Once the customer enters the online store and buys low-cost products, they may be attracted by other products that can help gain profit for the business. This attraction of customers to your business through reduced costs can help clear up inventory and stock that was not at the forefront before. 

3. Setting up prices just as your competitors (Price Matching) 

When prices align with competitors’ prices, then the focus moves to the product, and customers will focus on how your product is better than others. 

Example 

Amazon, Barnes & Noble, and IndieBound are three websites that sell the same best-selling novel, “The Nightingale” by Kristin Hannah, for the same amount of money: $14.99. 

As their prices are the same, customers pay attention to other aspects to decide on a purchase: 

Free shipping: Amazon provides free shipping for Prime members, and Barnes & Noble provides free shipping on orders greater than $35. 

E-book availability: IndieBound sells the e-book copy of “The Nightingale” for the same amount as the paperback, whereas Amazon and Barnes & Noble sell the e-book for a little higher. 

Book recommendations and reviews: Amazon’s website has extensive book reviews and recommendations from fellow readers, while Barnes & Noble provides unique author interviews and behind-the-scenes materials. 

What are some factors to consider when using competitive pricing? 

To know whether a competitive pricing strategy is suitable for your business, it is best to evaluate it based on these factors: 

Market Research 

Do your market research to know who else is offering the same product as yours. 

Cost of Product 

Be considerate of the costs of inputs such as labor, shipping, overhead, and material costs when deciding upon the prices. 

Target buyers 

Understand the target market and what customers will pay for the product or service. Price-sensitive consumers anticipate competitive prices. 

Market Trends 

Keep an eye on market and industry trends and shifts in the overall economy that may affect customer demand or expenses. 

What are the advantages of competitive pricing? 

A competitive pricing strategy is not suitable for every business type. Thus, it is best to perform thorough market research and evaluate your product and business roadmap for informed decision-making. Some benefits of competitive pricing are: 

Ease of Application 

Competitive pricing is simpler than other pricing strategies. Firms look at the prices of comparable products and services in the marketplace and determine where they want to position themselves in relation to these. If their product is of higher quality, they can price theirs a little higher than others and promote these attributes. If they have a ‘basic’ version available to more potential buyers, they can use a loss leader pricing strategy. 

Entry into the market 

This pricing plan is suitable for new entrants that quickly wish to make a footprint in the market. When newcomers do not have sufficient data for pricing, they may take advantage of preexisting research done by competitors. 

Increased Revenue 

Price matching, or loss leader pricing, being a competitor-based pricing strategy, can assist businesses in capturing competitors’ market share. Clever consumers always price compare—within the store or on the Web—to be able to find the best price. This move can successfully keep customers or switch them from competition. 

Profit Boost 

Competitor-based pricing can increase profit if applied properly. Premium pricing can definitely do this, though it could be at the cost of volume. Production costs must also be taken into consideration if you plan to price drop or price match. Keeping track of everyone else’s prices is basically impossible, but the use of dynamic pricing software can help analyze huge data sets, including competitor pricing. 

Contentment among Customers 

In highly competitive markets, customers are well aware of products and their spending mechanism. Using competitor pricing allows them to judge value based on how varying prices are between various brands. 

What are some challenges of competition-based prices? 

There are numerous challenges that your business might face when implementing this type of pricing model. 

Reduced profit margin 

When pricing is dependent on how the competitors are strategizing products, it can bring a business to the bottom. Businesses that disregard costs of production and other factors while blindly monitoring competitors risk their business by reducing margins. Meeting customer expectations while ignoring how much profit margin you have can have a crippling impact on your business. 

Undervaluing Products 

Businesses that base their pricing on competitors may risk potential revenues they can make. Lack of qualitative research and price determination based on market supply and demand curves may compel businesses to underprice their product, thereby losing potential revenues. A top-quality product can justify price regardless of how competitors are pricing their items. 

Over-reliance on competitors 

Completely depending on competitors can make you only as accurate as they are in the pricing decision. When your prices are determined by your competitors market research, it makes you reliant on others, leaving zero room for innovation. This in turn leads to loss of customers and even business downfall in the longer run. 

What are some examples of competition-based pricing? 

 Having a clear understanding of competition-based pricing through examples can be helpful. Take a look at some examples to better comprehend the concept. 

Premium pricing 

A company sells hair curling rods. The average price of a rod in their market is $120. However, the company’s hair curling rods come with advanced features such as quick heat and hair protection mode. Thus, they set their price at $200 owing to features. 

Price Matching 

Company A is an online fish feed seller. They sell fish feed, aquariums, and relevant products. Their competitor is company B. Company A claims to match any price for the same product as company B. This means company A offers a price match guarantee. If any customer finds any product at a lower price on company B’s website, company A will match that price. 

Loss-Leader Pricing 

Company A sells protein powder. The average cost of whey protein across all brands is $50 per container. Company A’s whey protein is of the same quality as the competitors, but they want to increase their market share. They price their product at $45 per container to attract price-conscious customers away from their competitors. 

What is price skimming? 

It is a pricing strategy in which customers are charged the highest price they can pay. However, with the passage of time, the company lowers prices to reach maximum segments of the customer base. High prices at the start are to target those who are willing to adopt a new product. As these fresh customers are content, and more competitors enter the market, the company will reduce prices to gain attention from price-sensitive buyers. 

Unlike penetration pricing, where prices are adjusted low at the start to gain customers, the skimming concept begins with high prices so the business maximizes initial profits before bringing down prices. This concept is linked with the new product launch in the market. The goal revolves around gathering revenue when no competitor has entered the market. 

This strategy is best suited for products with high perceived value or cutting-edge features, where price insensitivity is higher among early adopters. First targeting these consumers, businesses are able to recover their investment within a short period and make considerable early profits. After the market becomes more crowded with competitors, reducing the price assists in reaching a wider base of consumers and preserving market share. 

Example 

One of the most interesting examples of price skimming is the launch of the new Apple iPhone. As soon as the product is launched, the prices are set high so that those who are willing to adopt this advanced version of the iPhone may pay high amounts. However, as the passage of time, this price decreases to gain the attention of a price-sensitive customer base. 

What is aggressive pricing? 

Aggressive pricing is a type of competitive pricing in which a company seeks to outdo competitors in every way. It targets setting your prices apart from the competitors to gain revenues and more customers. It is a highly reactive pricing strategy that takes into account every move of the competitor. 

For example, if a competitor sets the price of air coolers at 50 cents, the competitor company will offer a 30-cent price for that product. 

Features of Aggressive Pricing: 

Low prices: Aggressive pricing includes charging prices significantly lower than those of competitors. 

Extremely reactive: This pricing approach is extremely reactive, reacting immediately to each action taken by competitors. 

Competitive emphasis: Aggressive pricing is concerned with beating competitors at all costs, as opposed to emphasizing the value proposition of the product or service. 

Short-term: Aggressive pricing is usually utilized as a short-term tactic in order to achieve sales and procure market share. 

What are the steps for developing a competitive pricing strategy? 

It is not an easy task to develop a competitive pricing strategy. However, taking small steps and understanding your company’s needs is crucial. For easy understanding, here are some steps for developing a competitive pricing strategy: 

Data Analysis 

You must begin by getting your data streamlined. Track consumer behavior, how they shift preferences as a response to changing prices, what the customer responses to discounts are, and more. You can use your CRM to gain insights into consumer behavior. 

Market Evaluation 

In-depth market research is necessary for accurate use of this type of competitive-based pricing. It includes gathering data trends, customer needs, and competitor activity. 

Clarity of goals 

Chart your roadmap for correct use of pricing strategy. Jot down how you wish to gain a competitive edge and stay beyond your competitor’s activities. Make sure all your teams within the business are on the same page. 

Dynamic pricing 

By keeping a check on supply and demand, inventory levels, and competitor prices, your team can rapidly match the market conditions. Thus, staying dynamic can lead to a win-win situation.