An effective pricing strategy is essential to helping a business maintain competitive pricing and offer prices that align with the competition. A business can choose from various pricing strategies based on various factors. It can set a price to maximize profitability for each unit sold or the overall market share. It can set a price to stop competitors from entering the market, increase its share, or stay in the market. Pricing is one of the most important components when creating marketing strategies.
The price is one of the first things a consumer notices about a product and is one of the deciding factors when buying it. I will further explain the competitive pricing strategy, its examples, and how to create a competitive pricing strategy.
Key Points
- A competitive pricing strategy is a retail pricing strategy in which brands and retailers set prices based on competitors’ similar products.
- A competitive pricing strategy is used more by businesses selling similar products since services can vary from business to business while the attributes of a product remain similar.
- You must know your direct and indirect competitors in a competitive pricing strategy.
- Using a pricing strategy based on competition, businesses have three choices when establishing prices for their goods or services: Lower, Higher, and Equal Prices.
- Tips for competitive pricing include lowering manufacturing costs before lowering market prices, assessing target customers’ needs beforehand, researching competitors’ pricing options for similar products, and knowing when to use a different pricing strategy.
What Is Competitive Pricing Strategy?
A competitive pricing strategy is a retail pricing strategy in which brands and retailers set prices based on competitors’ similar products. This pricing method focuses solely on the public prices of your competitors, but it does not consider how much customers value the product or production costs.
A strong competitive pricing model is based on thorough market research. When you know the prices of your top competitors in your market and how those prices might meet customer expectations, you have a basis for determining the prices of your products or services. Competitive pricing strategies can come in many forms. A business can always choose to be the cheapest of its competitors or always offer the average price of the highest and lowest-priced competitors – they all count as competitive pricing strategies.
Understanding Competitive Pricing Strategy
Businesses have three options when setting the price for a good or service: set it below the competition, at the competition, or above the competition.
Above-the-competition pricing requires the business to create an environment that warrants the premium, such as generous payment terms or extra features. Rather than compete on price, the business must compete on quality if it hopes to charge a premium price.
A business may set the price below the market and potentially take a loss if it believes the customer will purchase additional products from its business once exposed to the other offerings. The profitability of the other products can then subsidize the economic loss incurred on the below-market-priced product. This is also known as a loss leader strategy.
Lastly, a business can charge the same price as its competitors or take the prevailing market price. Despite selling an equivalent product at a comparable price, the business may still attempt to differentiate itself through marketing.
What Are Three Competitive Pricing Strategies?
Using a pricing strategy based on competition, businesses have three choices when establishing prices for their goods or services:
#1. Lower Prices
Your goods or services are lower than your competitors’ prices in your market. This strategy can be lucrative for businesses that capitalize on economies of scale. Lower price points can also be used as part of a loss leader strategy. Frequently implemented by businesses entering a market for the first time, a loss leader strategy is a technique in which goods or services are set at a lower price point that’s not profitable but draws in new customers or enables a business to sell additional, more profitable goods or services to those customers.
#2. Higher Prices
Your goods or services are higher than your competitors’ prices in your market. This strategy is used by businesses that offer goods or services with more features or benefits than their competitors. Higher price points are typically used by businesses with a well-established brand reputation and provide a “premium” or “luxury” product compared to other businesses in their market or niche.
- Price Skimming: When businesses introduce a new product into the market, they can use price skimming as a competitive pricing strategy. Price skimming is the technique of charging the highest initial price that customers will pay when demand is high and then lowering that price over time. Once as much revenue is made as possible and competition starts to enter the market, businesses can lower their product prices to attract new cost-conscious customers while staying competitive against competitors now producing similar products.
#3. Equal Prices
The prices of your goods or services equal your competitors’ or the prevailing market price. Businesses that select equal price points to their competitors try to differentiate themselves by creating unique shopping experiences or offering more attractive product alternatives (e.g., using sustainable materials or manufacturing processes to attract eco-conscious audiences).
- Price Matching is another competitive pricing strategy used when businesses cannot promptly collect, analyze, and act on competitor pricing data or fluctuations. Businesses that offer price matching options for their customers can stay competitive in their market without closely following their competitors’ pricing strategies or constantly updating their point of sale (POS) system or eCommerce store.
How to Set a Price Based on a Competitive Pricing Strategy?
To figure out how much your product should cost, you need to compare it to similar products. You need to group your competitors and see where your product and brand fit in the range between them.
You must know your direct and indirect competitors in a competitive pricing strategy. Directly competing products offer similar services for one specific market share, whereas Indirect competitors overlap with yours in different ways. They may only have similar features or provide an entirely new product line that does not directly compete with your company’s offerings (but could still affect revenues).
You can price your product in three ways after thoroughly analyzing your competitors. You can price your product at a rate above or below your competitors, or you can price your product at the same price as your competitors.
- If you think your products or services are better than those of your competitors, you might want to price them higher than they are.
- If you price your product the same as your competitor, you need to focus on the added value your product can offer. Even though your product and its features are the same as your competitor’s, emphasizing the added value will make people more likely to buy from you.
- Pricing your product lower than your competition is usuallyn’t a good idea. However, you can do this to attract more customers and increase sales, but make sure that your product is still of good quality.
Competitive Pricing and Price Matching Offers
When a company cannot anticipate competitor price changes or is not equipped to make corresponding changes promptly, a retailer may offer to match advertised competitor prices. This allows the retailer to maintain a competitive price point for those who become aware of the competitor’s offer without officially changing the price within the retailer’s point-of-sale system.
For example, in November 2014, Amazon projected price changes to approximately 80 million items in preparation for the holiday season. Other retailers, including Walmart and Best Buy, announced a price-matching program. This allowed Walmart or Best Buy customers to receive a product at a lower price without risking customers taking their business to Amazon solely for pricing reasons.
Tips for Competitive Pricing
When determining competitive pricing, business owners and sales professionals need to consider whether it’s the right option for their business. Review these competitive pricing tips:
#1. Lower Manufacturing Costs Before Lowering Market Prices
The cost of production is a major factor in the market prices businesses can sell their products for while still making a profit. Therefore, businesses must determine if they can maintain product quality while lowering manufacturing costs to a level where they can sell products at or below their competitors.
#2. Assess Target Customers’ Needs Beforehand
Sometimes, consumers don’t care about pricing; they care more about product quality or using well-known brands. That’s why businesses must consider what factors keep customers re-purchasing and whether competitive pricing is necessary.
#3. Research Multiple Competitor’s Pricing Options for Similar Products
When considering a competitive pricing option, businesses should review the market prices of other industry competitors beyond their primary competitors. This allows them to visualize the range of pricing for the same product and whether other businesses are trying to match top competitor pricing.
#4. Know When to Use a Different Pricing Strategy
Competitive pricing isn’t always the pricing strategy a business needs to obtain better profit margins. For this reason, businesses should determine whether another pricing strategy would better benefit their needs to maintain product quality and customer satisfaction.
How to Create a Competitive Pricing Strategy
Creating a competitive pricing strategy involves several steps and considerations to ensure pricing aligns with market expectations while meeting your business objectives. Here’s a comprehensive checklist I provided to guide you through the process:
How to Create a Competitive Pricing Strategy Checklist
Competitive Pricing Strategy Example
The concept of competitive pricing is best understood when only two competing parties exist. For example, suppose two companies manufacture detergent for washing clothes. In that case, both brands will try to keep their prices in line with each other and advertise their products to stand out in quality and features to compete with the other brands.
Even big corporate giants sometimes use competitive pricing strategies to increase market share. They have to set the price almost equivalent to their competitor, even if the production cost is high. If the production cost is higher, they’d have to play around and adjust the prices of packaging, advertising, and distribution. Here are some of the other top competitive pricing strategy examples:
#1. Airline Industry
The airline industry is known for its relentless pricing wars in a highly competitive market. These wars are occasional skirmishes and ongoing, strategic battles on various fronts. Airlines understand that pricing can make or break their competitiveness in this market, and as a result, they’ve become adept at making real-time pricing adjustments to attract travelers.
Airlines often employ several tactics to gain an edge:
- Discounted Fares: Airlines create the allure of affordable travel by offering discounted fares on select routes. For instance, a carrier might offer significantly lower fares on a specific route, compelling travelers to choose them over competitors.
- Seat Sales: Frequent seat sales are common in the airline industry. These time-limited promotions allow travelers to secure reduced-priced seats, creating a sense of urgency.
- Innovative Bundles: Airlines may bundle services, such as combining flights, accommodation, and car rentals, to offer travelers comprehensive packages at competitive rates. This approach attracts cost-conscious consumers and simplifies the travel booking process.
Southwest Airlines Vs. American Airlines
Southwest Airlines: Known for its customer-friendly approach, Southwest is generous in its pricing strategy. When you book a flight with Southwest, you can check your first and second bags for free, change your flight without incurring a fee, and even cancel your flight at no extra cost. They offer the option of EarlyBird Check-In for a reasonable fee and upgrades to your boarding group for a modest charge. In-flight Wi-Fi is available for $8 per flight.
American Airlines: While a formidable competitor, American Airlines often charges for these extras. Depending on destination and ticket class, baggage fees range from $30 to $75 for the first checked bag. The second bag carries an extra cost ranging from $40 to $100 depending on your route and ticket class. Third bag fees are typically set at $150 or $200. Overweight and oversized bag fees vary widely based on destination, ticket class, and bag weight. Same-day flight changes can cost anywhere from $75 to $150 in the main cabin. Although available on some flights, in-flight Wi-Fi generally starts at $10.
In this case, the differences in competitive pricing are crystal clear. Southwest Airlines’ approach, offering numerous free extras, including baggage, flight changes, and flight cancellations, proves to be a budget-friendly choice for travelers. With additional fees for these services, American Airlines can quickly become a pricier option.
These pricing strategies are not limited to domestic carriers. International airlines, such as Qatar Airways, regularly roll out enticing offers like the “Global Travel Boutique,” offering discounts on flights to popular destinations worldwide. Such promotions help them compete with both local and international rivals.
#2. Telecommunications Sector
The telecommunications sector stands as a paragon of relentless competition. In the age of seamless connectivity, cellular service providers are at the forefront of this battle, constantly adapting their pricing strategies to gain an edge and capture a larger slice of the market. To secure and expand their market share, these companies engage in pricing battles that unfold in various ways:
- Unlimited Data Plans: In recent years, unlimited data plans have been at the forefront of pricing battles. Major carriers like AT&T, Verizon, T-Mobile, and Sprint have competed vigorously by offering unlimited data packages with varying features and price points. This has led to lower prices and greater flexibility for consumers.
- Price-Matching Guarantees: Many telecommunications providers offer price-matching guarantees to attract customers. If a consumer finds a better deal with a competitor, these providers promise to match or beat the price, ensuring that consumers get the best value.
- Bundled Services: Bundling services such as internet, TV, and phone packages has been another competition area. Providers are constantly refining and expanding their bundled offerings, giving consumers more options at competitive prices.
T-Mobile vs. Verizon & Sprint (Now part of T-Mobile)
In the United States, T-Mobile is known for its bold pricing strategies. T-Mobile pioneered the “Un-carrier” movement, which defied industry conventions. They bid farewell to contracts, introduced early upgrade options, and unveiled unlimited data plans to disrupt the market. This innovative approach stirred competitive responses from Verizon and Sprint (now part of T-Mobile), inciting a pricing war that ultimately resulted in more affordable plans and improved consumer offers. Sprint, for instance, introduced its “Unlimited Freedom” plan, delivering unlimited data, talk, and text at a price point lower than some of its competitors.
#3. eCommerce Sector
Competitive pricing strategy is a time-tested approach for businesses in the e-commerce sector. This strategy revolves around setting prices that match or undercut competitors while maintaining or enhancing the perceived value of the product or service offered. It’s a delicate balance that e-commerce giants like Amazon, Walmart, and eBay have mastered. Here’s how they do it:
- Real-Time Price Monitoring: E-commerce giants use sophisticated algorithms and data analytics tools to continuously monitor their competitors’ prices. By doing so, they can promptly adjust their prices to remain competitive.
- Dynamic Pricing: Dynamic pricing involves adjusting prices based on various factors, such as demand, competitor prices, and a shopper’s browsing history. E-commerce platforms can raise or lower prices on the fly to maximize revenue and market share.
Amazon vs. Walmart
In the retail sector, Amazon and Walmart are synonymous with fierce competition during the holiday season. During major shopping events like Black Friday and Cyber Monday, these retail behemoths engage in intense price wars, each striving to offer the best deals to lure customers. In 2020, Amazon’s “Holiday Dash” event was a strategic move to get a head start on holiday sales. This aggressive approach prompted Walmart to rapidly respond with its irresistible offers, sparking a price-slashing frenzy across diverse product categories. From electronics to household essentials, shoppers witnessed significant price reductions as these giants vied for attention and market share.
How Often Should a Business Reassess Its Competitive Pricing Strategy?
You should reassess your competitive pricing strategy regularly. Market conditions can change rapidly—new competitors may enter the market, existing competitors might adjust their pricing, or customer preferences could shift. By reviewing your pricing strategy frequently, you can ensure that your business remains competitive and adapts to any significant market dynamics.
Furthermore, more frequent reassessments may be necessary during rapid growth, product launches, or significant external changes like economic or regulatory changes. Staying proactive with these reviews helps you capitalize on opportunities to refine your pricing for better market alignment and profitability.
Benefits of Competitive Pricing Strategy
When equipped with comprehensive competitor pricing data, implementing a competitive pricing strategy can benefit your business in several ways.
#1. Increase Traffic
Whether you’re starting a brand-new business or have been selling in your market for years, increasing traffic to your store—eCommerce or in-store foot traffic—helps you get your brand out there. Using a competitive pricing strategy, you can incorporate discount strategies and tactics such as offering a lower price than your competitors or implementing a loss leader sales campaign—both of which can help you attract more consumers, create more leads, and increase sales.
#2. Prevent Market Share Losses
Competitive pricing strategies—especially those that implement pricing software to capture competitor data in real-time—enable you to analyze and react to pricing changes your competitors make on the fly. Not only does this help you make more strategic decisions in the long run, but it also helps you prevent market share losses because you can anticipate and consider competitors’ prices dynamically and keep track of margin levels for the business. By always ensuring your prices remain market-relevant, shoppers will be less likely to turn to your competitors and more likely to buy your business’s goods or services.
#3. You Can Use It With Other Techniques
If you worry that a competitive pricing strategy may not yield the best results for your product, you can combine it with another technique. Combining competitive pricing with another market research approach may be the best strategy for your business if you are uncertain about relying on competitive pricing alone. For example, you may use customer surveys to understand how customers compare your prices with competitors to assess which ones to base yours on in the future.
#4. Boost Profit Margins
Selecting competitive prices for your goods or services doesn’t always mean taking profit losses. If your goods or services are priced lower than your competitors, there could be room for you to raise your prices while remaining competitive and boosting profit margins. This is especially true if your goods or services have a unique value proposition (UVP) compared to your competitors. A business may differentiate from the competition if it can uncover and consider specific product attributes like different packaging, additional accessories to the product, etc., that bring more value to customers and increase their willingness to pay. If it can incorporate that information well into its competitive price strategies, then the pricing will be market-relevant and profitable.
Another way is to provide your customers with unique and frictionless shopping experiences that are better than your competitors.
What Are the Problems With Competitive Pricing Strategy?
Look over these potential problems of competitive pricing strategy to enhance your decision-making in your sales or marketing job:
#1. It Can Be Inaccurate
Competitive pricing can help you estimate product values, but the approach can lead to some inaccuracies. Not all products are the same, even if they’re similar. Relying on what your competition charges may not be the best approach if your product differs significantly from theirs. The price that competitors list may also not provide enough information. Some companies employ payment plans or discounts for memberships that factor into their pricing models. If you don’t know a competitor’s entire sales process, then using the listed price as your product’s baseline may not be the best strategy.
#2. It Doesn’t Focus on the Customer
One of the most important business principles is focusing on what the customer wants and what they’re willing to pay for it. By using another company as the model you base your price on, you may lose important pricing factors, such as the target audience’s preferences. The competitive pricing strategy can be useful to see how you compare to other businesses. However, if you aren’t pricing your item at a point where customers are still interested, this strategy can be ineffective.
#3. Your Product May Blend in With Others
Many companies use the price of their product to distinguish it from the competitors. By following the price set by other companies, you may lose the ability to distinguish yourself in this way. If you want to make a statement about why your product is better, setting a higher price than the market average can be a way to convey its value. If you follow the price set by others, your product may blend in with the competitors, even if it’s superior.
#4. Unsustainable Strategy in the Long Term
A competitive pricing strategy can be sustained during the initial stages of market entry. Still, as you progress, you may not be able to use it long-term. Your competitors might be improvising based on the market pricing data or might change pricing entirely with a change in marketing strategy to focus on a different market segment. This model is attributed to short-term goals, and you could tank your profits in the long run if you follow the same strategy because as you scale, you need to evolve your pricing strategy based on your product and not on what someone else has to offer. You will soon need to adjust your pricing strategy based on consumer demands and market insights.
How to Do Competitive Pricing Analysis
A competitive pricing analysis can be performed by following five simple steps:
Identify your competitors
Analyse customer trends
Observe competitor pricing strategies
Evaluate brand positioning
Understand your costs
Let’s break that down.
#1. Identify Competitors
First, know who you are up against. Draw up a list of direct and indirect customers in your target market. Analyze their performance and positioning to better understand how to price products relative to them.
#2. Analyse customer trends
To put your competitive pricing analysis into context, you must develop a deep understanding of your target market. When are they most likely to buy? When do they expect discounts? Where do they prefer to shop? Build a forecast demonstrating how purchasing behaviors may change or shift throughout the year.
#3. Observe Competitor Pricing Strategies
Take note of all the market pricing strategies you can see in the market, including any you discover during this information-gathering stage. For example, if one business cuts its prices, do others follow? If so, who – and to what extent?
#4. Evaluate Brand Positioning
Consider where your company and each of its competitors sit in the market. Are you the luxury option or the cheap option? Which audience segments do Competitor A serve better than Competitor B? Consider this information when setting prices.
#5. Understand Your Costs
To accurately determine how much pricing flexibility you can afford, you need to know exactly how much goes into your cost of production and cost of sales. Implement inventory management software with reporting features to break down the accurate cost of goods sold (COGS) across the business – this allows you to be certain about the profitability of each product you sell.
Bottom Line
With almost 92% of shoppers comparing prices at some point or the other while shopping online, many companies have to resort to competitive pricing to ensure their consumers do not move to another competitor for their low costs. In most cases, competitor intelligence and benchmarking tools are the key decision-making resources for determining competitive prices. With these intuitive pricing tools, retailers can optimize their prices in near real-time to take advantage of market movements while maintaining profitable margins and getting an edge over their competition.
In addition, a competitive pricing strategy isn’t always the best strategy for every business.
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