Price competition is a form of competition by which a product or service can compete with other products or services in the market only on the aspect of pricing. The competition or rivalry between the products is related exclusively to the pricing of the products.
It may be related to different types of pricing, like retail price or customer price. The primary aim of price competition is to differentiate the products against competitors and to achieve an increase in sales.
The price competition is carried out in case of similar or identical products or services, and it is considered as a push to increase the sale of the product.
Understanding Price competition
Setting the price of a product is often the biggest determinant for the success or failure of a product. When two or more products which are similar in characteristics and more or less are substitutes of each other, then the purchasing decision of customer rests solely on the price of the product.
Some companies compete in price competition by merely pricing the product lower than a competitor but do not pay attention to the features.
The product is considerably low priced than the competitors but lack features. Even in terms of quality, the product may not be up to the standards or market leader.
The other companies which compete in price competition price their product lower than the market leader but higher than the lowest priced competitor.
These moderately priced products neither have full-fledged features like market leaders nor do they have the lowest standards. These are moderately priced, optimum featured products or services.
Theoretically, it can be graphically represented that as the price of the product decreases, the sale increases, and thereby profit increases.
The profit is the difference between the selling price and production price, but as the difference in both decreases, the profit should decrease, but due to bulk selling, the lower profit margin can yield good results for the organization.
This holds up to a certain level beyond which the organization starts to incur losses because the difference in selling price and production price is negligible or zero. If the price is further lowered, then the sale will surely go up, but since the product is priced way below the market average, the firm would go into losses.
The other aspect of price competition is price matching and competitive pricing. To understand this, let us consider an example:
A packet of Kellogg’s Cereals is priced at $5, and Cheerios is for $6. In terms of price competition, it is clear that Cheerios is priced more than Kellogg’s and it would be the first choice of the customers when buying the cereals.
But to match the competition pricing or even beat them, Cheerios would have an offer which would be like Buy 2 Cheerios for $10 or 3 Cheerios for $14.
In the first scenario, the price of a per-packet of Cheerios is matched with that of Kellogg’s which comes to $5 per packet an in the second scenario the packet comes to about $4.67 which is cheaper than Kellogg’s.
In both cases, from the customer’s point of view, there is price benefit, and from company’s point of view, apart from beating the competition at a price, there is bulk buying from customers which helps them to finish the stocks faster.
Types of Price Competition
#1. Loss Leader:
Loss leaders the situation in which a company or a shop for an eCommerce website prices one of the product cheapest than others. This is done in the hope the customer will buy other product while buying the loss leader.
This is expected to cover for the losses incurred if any while applying a loss leader strategy. To know more about Loss Leader, click here.
#2. Market Penetration:
A product or brand is priced at a low cost compared to their competitors to gain access and establish a base for the customers and establish brand awareness. Market penetration is a commonly used price competition strategy by buying new brands in an established market.
#3. Premium Pricing:
Products or services are better concerned about the causative and brand image use a premium pricing strategy. Budgetary of pricing premium is also considered as a price competition because the form for the product-wise to differentiate itself from others by being premium.
In the case of dumping the intention is to ensure that the competitor is out of business which is why the pricing that is followed in dumping is extremely economical compared to the other competitors. The price of a product or services is way below the average price of other products.
#5. Predatory Pricing:
Predatory pricing is implemented with the intention of creditor pricing is to discourage computers from entering the existing market. It is also considered as a form of price competition.
Free products offered with the purchase of an existing product which gives an edge over the competitors.
The price of the free product is compensated in the price of the product, but the fact that it is given for free of cost gives the psychological impact of the product being good and attractive to the customers.
Advantages of Price Competition
There are two aspects of Price Competition, for customers and retailers or companies.
For customers, price competition is beneficial because it gives them the comparative prices of different products and they can choose which is best suited for their needs and which is priced at a low cost.
From the point of view of companies, many companies or retailers follow the concept of multiple pricing in which they provide both low priced product as well as the high-end product.
This is done to cater to every category of customer. Having a price competition with different products is useful for companies so that they have different products in their offerings.
Also for the products or services which are priced at a lower cost, they witness a fantastic growth in sales. This is helpful, especially for the new entrants in the market and the new companies who want to penetrate and establish a customer base in the existing highly competitive market.
Disadvantages of Price competition
From customers, price competition gives multiple options to the customers, and it is not necessarily true that a low priced product will be good in terms of quality. For customers who choose the lowest priced product, it may turn out to be a gamble.
For companies, the primary disadvantage of price competition is that price reduction reduces the profit margins.
The more the difference between production cost and the retail price, the better is the profit, but in the case of price competition, it is necessary that this difference is reduced to have a better sale.