Competitive pricing is a pricing strategy that enables a business to offer goods or services at a lower or the same price as its rivals. Businesses can likewise opt for this type of pricing by offering more appealing payment terms than their competitors.
The competitor-based pricing determines key retail prices to successfully reap the benefits of a commodity or service-oriented market compared to the competitors. Because services tend to differ from industry to industry, while the commodity’s qualities stay constant, this pricing strategy is more commonly utilized by firms offering identical commodities.
Table of Contents
What is Competitive pricing?
Competitive pricing is a pricing strategy in which a company sets the product price in line with the prices of its competitors’ products. When numerous companies offer the same sort of services or products, competitive pricing aims to keep the margins of profit intact.
Competition-based pricing is the way of deciding the market price of goods and services as per the amount competitors are charging for similar products or services. The pricing as per competitors’ prices is used when a price for a product or service has reached a level of equilibrium.
Why do businesses choose competition-based pricing models?
Often businesses opt for competitor based pricing strategy for the following reasons-
- To meet consumer demand by selling products at the price that target audiences are already accustomed to
- To prevent customers from going to competitors in quest of the same product/service at a lower price
Types of Competitors in Competitive Pricing
When using a competition-based pricing technique, there are different ways through which price is calculated-
- Direct Competitors: These competitors contend for the same share of the market by offering similar commodities.
- Indirect Competitors: These are the competitors who sell a product or service similar to your services yet create solutions in a little specific fashion. They could be items that have a few functionalities in common with your services and don’t fight for market dominance in a holistic approach.
How is Competitive Pricing Calculated?
Three ways through which competitive pricing analysis can be done are-
- Pricing above the competition: Selling goods or services at prices higher than that of competitors. Brands do this when they feel their products or services are a notch above other competitors in the market
- Pricing on the same level: This strategy is also understood as price matching. Brands prices their product similar to that of their competitors. In such cases, brands give additional focus to the USP of their products to differentiate them from competitors
- Pricing below the competition: This type of competitive pricing is used by businesses whose products or services have limited features in comparison to their competitors. Businesses also have lower prices for their products for grabbing more attention and sales.
Types of Competitive Prices
a. Low Price
Due to a few variables, companies regularly choose market pricing that is lower than those of their rivals. They may opt for a lower sale price since they know that their products are of poorer quality. If they don’t notice a surge in demand after matching their selling prices to the selling prices of their competition, they may cut their market prices.
b. Matched Price
Your price is set similarly to the services or products of the competitors. However, even if your products and attributes are like those of your rivals, your central emphasis must be the additional benefit your product provides.
c. High Price
If your brand has a better reputation and your product or service has more features and functionality then selling higher to the competitors can be a useful tactic. This tactic is also effective in converting early adopters. It can be used even when you wish to attract clients’ interest by offering competitive pricing to enhance the market share and increase sales and value of the brand.
Common Competitive Pricing Strategies
a. Penetration Competitive Pricing Strategy
When products or services are sold at price levels that cause a customer to take more notice, it is called penetration pricing. This method could be used by a new provider of services to steal clients from a rival or acquire a footing with the first or price-sensitive target audiences.
b. Promotional Competitive Pricing Strategy
Promotional pricing is based on a good sale background. Quality product suppliers are frequently ready to work at lower profit margins to maximize sales and total income.
c. Captive Competitive Pricing Strategy
How to conduct a pricing analysis?
Learning as often as necessary regarding your industry and economic contemporaries is essential for competitive pricing. To do a comparative price study, follow these basic steps:
- You should examine your current position in the market. Identify where your company is in the project lifecycle of a company. If you have a well-established business, well-publicized quarterly or monthly profits may help you develop.
- Businesses should determine who their direct rivals are. List your competition’s assets and flaws in either situation. Profit from their shortcomings.
- Brands should calculate the figures. Create numerous income predictions using the software. Examine the effects of varying profit margins and sales volume on results over time.
- Businesses should set achievable objectives. Create a model with specified expenses. Determine the quantity and pricing patterns necessary to work out and the profitability expected from predicted sales.
- Brands should also analyze the outcomes. Your company will be more flexible if you keep track of total sales. If sales data don’t reach expectations, you can modify prices as you go.
Competitive Pricing Advantages
a. Easy implementation
Competitor pricing is simple because it requires some common sense and knowledge as to who your rivals are and their activities with their products in the market. It can be easily implemented using a few tools and in a few basic steps.
b. Low Risk
Because your rivals are intense competitors who have existed and been in the game for a long time, your pricing scheme will have a lesser amount of risks. It also prevents market loss.
c. Improved profit margin
Competitive pricing does not suggest that brands should be cutting their prices or establishing prices at the lowest point in the market. Businesses can price their products in the middle of the range which can also optimize profit margin.
Here is a video by Marketing91 on Competitive Pricing.
Competitive Pricing Disadvantages
Though a competitive pricing strategy may be viable in the early stages of a business, you will be unable to use it as your business grows because your competitors may improvise based on sales data or change pricing entirely in response to a shift in the marketing plan to focus on a different audience.
This method is linked to short-term goals, and you’ll not enjoy the benefits in the long run because when time passes and you expand, you’ll need to adjust your pricing strategy to focus on your item rather than what others have to offer.
When you choose a competitive pricing strategy, you’ll lose out on information that your rivals may have. Since if they make a mistake, you’ll make a mistake, too. This could hurt your profitability and sales in the long run.
Because it’s a plan built purely on your competitors, you won’t stand out and can be lumped in with a large herd selling similar products and offerings. This will fail your business to stand out, and you shall become unable to justify why your products are valued the way they are.
What’s the difference between competitive pricing and demand pricing?
Demand pricing is not the same as a competitive price. It typically deploys sophisticated algorithms to boost prices during peak periods and lower them during periods of low demand. If you’ve ever requested a ride late at night in a large city, you will see demand pricing in action.
While competitive pricing is charging a price that is similar to what your competitors are asking for.
What’s the difference between penetration and competitive pricing?
Intentional usage and the conditions for deploying these are the deciding factors behind the differences between competitive and penetration prices. Competitive pricing is the practice through which firms try to imitate the prices to that of their rivals. The primary purpose of organizations that use competitive rates is to expand their client base and acquire a competitive edge over their company’s rivals.
Penetration pricing, on the other hand, is the procedure through which a company offers a new product by offering lower prices and establishing the market rate considerably under average. The primary purpose of penetration pricing is to have prices so cheap that rivals are discouraged from entering the market.
What is the definition of a competitive pricing analysis?
Competitive price analysis is the key strategy used by companies to evaluate feedback from customers on their rivals’ past competitive pricing activity.
This would enable brands to predict how consumers will react to price increases or decreases or whether this will have an impact on their purchasing patterns. Instead of focusing on how price competition will affect their earnings and the company’s processes, the rival consumer economy focuses on the reaction of consumers.
What jobs require knowledge of competitive pricing?
Different jobs that demand the knowledge of competitive pricing strategy are-
- Pricing analyst
- Product engineer
- Manufacturing specialist
- Market research analyst
- Accounting manager
Tips for Competitive Pricing
While making competitive pricing, businesses, entrepreneurs, and sales experts need to consider whether it’s the ideal choice for their business. Some of the tips that will help them in the process are-
- Lowering the manufacturing costs before lowering market prices
- Assessing the needs of the target customers beforehand
- Researching different pricing options of the competitors for similar products
- Being aware of when to use a different pricing strategy
As a final observation, it is clear that competitive pricing would help if you continually kept a watch on the competition in a market where cost is nearly everything.
Getting reasonable costs at the correct time can be quite beneficial to your organization. That’s why having a smart pricing scheme is so important. Competitive pricing is, without question, the most effective technique available and is employed by all kinds of businesses around the world. It can be not easy to employ competitive pricing correctly at times.
Now taking everything into account how effective do you find competitive pricing strategies for a business? Share your opinion with us in the comment section below.
Liked this post? Check out the complete series on Pricing