Pricing strategies are a key factor in deciding a business’s success or failure in today’s highly competitive market. A company’s pricing decisions can directly affect its profitability, customer retention, and overall market position. Competitor-based pricing is one of the most commonly used pricing methods today. Competitive pricing strategy is frequently used in markets where products or services are highly commoditized, and customers are highly price sensitive.
Businesses can prevent being undercut and losing market share by pricing their products and services in line with those of their competitors. Additionally, competitor-based pricing can be relatively easy to implement, as it involves monitoring and responding to the competitor’s prices.
If you’re ready, let’s understand what competitive pricing is and discuss the benefits and drawbacks of this strategy.
What is Competitive Pricing?
Competitive pricing means setting your prices in relation to your competitor’s prices. This is compared to other strategies like value-based pricing or cost-plus pricing, where prices are established by considering other aspects like consumer demand or the cost of production.
However, for competitive pricing to be successful, businesses need to understand their competitors’ pricing strategies and how consumers evaluate value. Businesses typically perform market research to analyse the prices of their competitors and determine the demand for their products or services in order to establish a competitive price. Businesses can find a pricing strategy that is both profitable and competitive using this competitive price analysis to beat the competition.
What are the different types of competitive pricing strategies?
A competitive pricing strategy is a pricing technique in which a company sets its prices based on what its competitors are charging for similar products or services. Here are some types of competitive pricing strategies:
1. Dynamic Pricing: With dynamic pricing, a product or service’s price is constantly adjusted based on a variety of variables, including supply and demand, competition, the time of day, the season, consumer behaviour, and more. This approach involves adjusting prices in real-time based on market conditions, such as demand or competition.
2. Price Skimming: Price skimming is a strategy that involves setting a high price for a new product or service when it is newly launched. The goal of price skimming is to increase revenue in the short term by targeting customers who are willing to pay a premium for a new or innovative product. Having a high price point may drive off potential customers, but it may also be a successful approach for businesses that are confident in the value and uniqueness of their products.
4. Penetration Pricing: Penetration pricing is a type of pricing strategy in which a company sets a low price for its product or service in an effort to gain market share and draw new customers. This strategy is frequently used by businesses entering a new market or launching a new product, as it can help them gain a foothold and establish themselves as a viable option.
5. Bundling pricing: This strategy involves offering products or services as a bundle at a discounted price, which can be competitive with the price of individual products or services offered by competitors.
Also, dynamic pricing strategies and price matching strategies are two types of pricing strategies that can be optimised using the power of competitor price monitoring. It’s important to note that while competitive pricing can be an effective strategy, it should be used with caution. Pricing decisions should constantly take into account a company’s costs, margins, and overall business goals.
Pros of Competitive Pricing Strategy
A competitive pricing strategy involves setting prices for products or services in accordance with what competitors charge for comparable offers. The following are some benefits of employing a competitive pricing strategy:
Improves Customer Acquisition and Retention:
Competitive pricing can help draw new customers and retain existing ones. Customers are always looking for the best discounts, and if a business can offer lower prices than their competitors, they may attract more consumers.
Increases Sales Volume:
Competitive pricing can boost sales volume. When businesses reduce their prices, they can sell more products or services, which can increase their revenue.
Maintains Competitiveness:
A competitive pricing strategy helps businesses stay competitive by modifying their prices to match or beat their competitors. This assists in the revenue and market share growth of businesses.
Facilitates Market Entry:
Competitive pricing can be especially beneficial for businesses that are expanding into new areas. By offering lower prices than established competitors, new businesses can attract customers who are looking for a better deal.
Competitive pricing can also help to increase brand loyalty among customers. Customers who believe 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 raising the customer satisfaction level.
| Pros and Cons of Competitive Pricing Strategy | |
| Advantages | Disadvantages |
| Improves Customer Acquisition and Retention | Price Wars |
| Increases Sales Volume | Reduced Profit Margins |
| Maintains Competitiveness | Short-Term Strategy |
| Facilitates Market Entry | |
Cons of Competitive Pricing Strategy
A competitive pricing strategy is a pricing approach where a company sets its prices based on the prices of its competitors. While this technique may seem effective, it also has its disadvantages. Here are some examples:
Price Wars:
Competitive pricing can also lead to price wars, where businesses engage in a race to the bottom in terms of pricing. This can result in a decrease in the perceived value of the product, which can ultimately hurt both companies in the long run.
Reduced Profit Margins:
When companies engage in competitive pricing, they may end up lowering their rate to match their competitors. This can result in lower profit margins, which would be negative for the business’s bottom line.
Short-Term Strategy:
The easiest strategy to draw customers isn’t necessarily to maintain lower pricing than your competitors. The idea is made worse by competitive pricing, which reduces price to a constant barrier that must be overcome. Even when customers would be prepared to pay more, lowering pricing creates concerns about the quality of the product or service and lower revenue from tiny profit margins.
Why do Businesses Choose Competitor-Based Pricing?
A competitor-based pricing approach may be used by many businesses, particularly startups and small firms, for a variety of reasons. When a new product or service is introduced, the company wants to appeal to its target market by charging what those customers are used to. Pricing determined by competition may also aid in preventing clients from turning to business competitors in search of less expensive products or services.
Create an excellent competitive pricing strategy with the help of pricing intelligence companies and witness an unprecedented increase in sales and revenue.
