What is Competitive Pricing?
Competitive pricing is a marketing strategy whereby businesses set prices based on their competitors’ prices. Also known as competitor-based pricing, this strategy can be used in online and offline markets and is often used to attract more customers and increase market share. However, for competitive pricing to be effective, businesses need to understand their competitors’ pricing strategies and how consumers perceive value.
According to Google’s Global Retail Study, 87% of consumers surveyed indicated that knowing they got a good deal was important in their purchasing decision. Therefore, brands should consider their competitors’ prices when pricing their products and services. There are several factors to consider when it comes to competitive pricing, such as the business’s cost structure, the price of similar products on the market, and customer demand.
- competitor-based pricing
- competition-based pricing
- competition-oriented pricing
Competitive Pricing Basics
For companies just getting started setting prices based on their competition, here are a few steps to take to determine if this type of pricing strategy is best for the business:
- Research the competition to understand what other businesses in the industry are charging for similar products or services.
- Consider the costs of materials, labor, overhead, and shipping when setting prices.
- Know the target market and what customers are willing to pay for the product or service. Price-conscious consumers expect competitive prices.
- Monitor market and industry trends, as well as changes in the overall economy that could impact customer demand or costs.
Advantages and Benefits of Competitive Pricing
Competitor-based pricing helps organizations to make sound strategic decisions regarding their products and services. There are several advantages of competitor-based pricing. First, it allows companies to better understand their relative position in the market.
In addition, it can help companies assess how much price changes will impact their business. Finally, it provides a way for companies to track their progress over time and make necessary adjustments to stay ahead of the competition.
One of the main benefits of competitive pricing is that it can help to attract new customers. If customers see that a business offers lower prices than its competitors, they are more likely to give that business a try. This can lead to an increase in sales and market share for the company.
Another benefit of competitive pricing is that it can help to boost profits. Even if a company can offer slightly lower prices than its competitors, this can still lead to revenue growth because the company will be able to sell more products or services at these lower prices.
Finally, competitive pricing can also help to build brand loyalty among customers. Customers who feel they are getting a good deal from a company are more likely to stick with that company in the future, leading to repeat business and higher levels of customer satisfaction.
Disadvantages of Competitive Pricing
While competing on price may be a good strategy for some companies, there are some disadvantages. First, this strategy doesn’t consider the products’ unique features. If a company’s product has features that competitors’ products don’t have, it may not make sense to compete on price alone. It also encourages companies to focus on short-term gains rather than long-term sustainability.
In addition, a competitive pricing strategy can lead to a race to the bottom, where companies constantly try to undercut each other’s prices, leading to lower profits and margins. Finally, this strategy can attract customers who only care about price which can negatively impact customer retention.
Competitive Pricing Strategies
Competitor-based pricing models include price skimming, penetration pricing, price matching, premium pricing, and loss leader pricing.
- Price skimming is when a company charges a high price for a new product to maximize profits. This strategy is often used when there is little or no competition for the product.
- Penetration pricing is when a company offers a low price for a new product in order to gain market share may discourage competitors from entering the market.
- Price matching, or parity pricing, is when a company matches the prices of its competitors. This strategy can help to ensure that customers do not switch to competing products.
- Premium pricing is when a company charges more than its competitor. Charging a higher price point helps the business differentiate itself from its competitors as a prestige or luxury brand.
- Loss leader pricing is when a company offers a low price product to expand its customer base. The goal is to make up for the low price with increased sales volume. This strategy can be effective in markets with a lot of competition and price-sensitive customers.
There are a few things to remember when using a competitor-based pricing strategy.
- First, it is important to ensure that the prices charged by the competition are accurate.
- Second, the prices charged by the competition must align with what consumers are willing to pay.
- Third, the prices charged by the competition must be sustainable. If the prices are not sustainable, a company may find itself in a position where it has to raise its prices to stay in business.
Conducting Competitive Price Analysis
Competitive pricing analysis is a tool that businesses use to assess the prices of their products or services against competitor prices. Analyzing competitor pricing enables business leaders to optimize pricing strategies and stay competitive in their market.
Several methods can be used to conduct a competitive price analysis. The most common practice is to compare the prices of similar products or services from different companies by looking at online price lists, contacting companies directly, or using a pricing comparison website.
Another method of analyzing competitors’ prices is to look at the prices charged by companies for similar products or services in different markets. This provides an idea of how the company’s prices compare to those of its competitors in different market segments.
Business operations teams can interpret this data and make pricing decisions using various analytical methods. Standard methods of competitive price analysis include porter’s five forces analysis, SWOT analysis, and regression analysis.
Using Competitive Pricing Intelligence
Competitive pricing intelligence is monitoring the prices of competitor products and services to inform strategic decision-making, product development, and marketing strategy.
Competitive pricing intelligence can be conducted through several methods, including online research, price comparisons, customer surveys, and data analysis. This data helps CROs develop a comprehensive understanding of the competitive landscape and make informed decisions about pricing strategy.
A simple way to conduct a competitive price analysis is to use a digital price comparison tool. These tools will often allow the user to input their pricing information and see how it compares to the prices charged by their competition.
This can be a very effective way to ensure that the company sets the best price for its product or service.
When used effectively, competitive pricing intelligence can give businesses a significant advantage in the marketplace. As a result, companies can make strategic decisions to help them win market share and drive growth by understanding what competitors charge for their products and services.
People Also Ask
Why do companies use competitive pricing?
There are several reasons why companies use competitive pricing as a marketing strategy. For one, it can help to attract new customers and boost sales.
Additionally, it can help to keep existing customers loyal to the brand while discouraging competitors from entering the market. Finally, companies may use competitive pricing as a defensive strategy. If a competitor launches a new product at a lower price, the company may match the price to protect its market share.
What is a competition-based pricing example?
Examples of competition-based pricing methods include:
1. Company A lowers its price below that of Company B, to steal market share.
2. Company A raises its price above that of Company B, to premium price itself as a higher quality option
3. Company A matches the price of Company B, to stay competitive.
4. Company A offers discounts or coupons to customers who purchase from them instead of competitors.
What are three types of competitive pricing?
There are three types of competitive pricing: price leadership, price matching, and price discrimination.
Price leadership is where the dominant firm sets the price point for the rest of the market. The other firms then follow suit and charge a similar price. This strategy is often used by firms with a large market share who can afford to set low prices and still profit.
Price matching is when firms offer the same price for their product or service. This pricing strategy is often used by smaller businesses that cannot compete on price alone and need to match the prices of their larger competitors.