Your pricing strategy is one of the most powerful marketing tools. You can invest in your website, allocate a large part of your budget to advertising, and have the best product on the market, but if your prices are too high or too low, you will not make any profits.
Your pricing strategy should take into account your costs, your desired profit margin, and the price points of your competitors. If you want to set competitive prices, you need to regularly check them against other players in your niche and make adjustments as needed.
There are a number of different pricing strategies, and each of them has its own set of advantages and disadvantages you have to consider when making strategic pricing decisions.
In this article, you’ll learn more about what a competitive pricing strategy consists of and how you can apply it to your business to maximize revenue.
Competitive Pricing Strategy Explained
At its core, the competitive pricing strategy is all about matching or beating the prices of your competitors, sometimes even by sacrificing your own profit margin.
Not every product offers unique value, which is where you can gain an edge by simply offering the best price.
The main principle of competitor-based pricing is that customers are price-sensitive and unless they are provided with something unique, they are very likely to choose the lower-price equivalent of your product.
The retail market has become more and more competitive over the years, with big players such as Amazon and Walmart forcing small businesses to find ways to stay afloat.
There are three ways to offer competitive pricing related to the prevailing market price, namely by setting the price of your product or service lower, higher, or equal to your competitors’ own prices.
Lower Price Point
With the price lower than the market average, you are trying to undercut your opponents. Depending on the production costs, you may have to either increase sales volume or decrease your target profit margins. The main benefit of this strategy is that you can attract a lot of customers who are price-sensitive.
The main drawback, however, is that you may have to sacrifice your own profitability and, in the long run, it can be difficult to maintain such low price points.
Higher Price Point
On the other hand, you could also price your product or service above the market average in an attempt to premiumize it. In doing so, you need to be wary of the value of your offer – you may want to differentiate your product in some other way as well, for example by offering additional services or a better customer experience.
Still, you need to find the perfect balance. If you price it too high, customers will either go for a cheaper alternative or wait until the price goes down, leaving you with unsold inventory.
Price matching – The Same Price
The third option is to price your product or service at the same price as that of your competitors. This strategy can be tricky, as you will need to find other ways to convince an undecided customer to choose you over your opponents.
You can make use of techniques not related to pricing, for instance, marketing your products towards a specific target audience or running a giveaway, to add extra value to your competitive price.
By price-matching your direct competitors, you can establish your position in the market segment without pushing too hard on your prices. At the same time, this strategy can be difficult to maintain in the long run and it may not always be possible to find a perfect balance.
The reason behind implementing the competitive pricing strategy is to get an edge over your competitors without risking lowering your profit margins too much – unlike, for instance, aggressive pricing or loss leader pricing.
However, in order to keep up with the prices offered by your market competition, you may want to optimize your production costs or save money in other areas of your business. The biggest risk of the competitive pricing strategy is that you may end up selling your product or service at a loss.
Thus, it is important to have an accurate understanding of all the costs involved in the production and delivery of your offerings before making any changes to your pricing model. You may also want to explore other pricing strategies with some of your products, such as the cost-plus pricing strategy.
To be competitive, you need to know what your competitors’ pricing models are. In order to make well-informed decisions, you need to have access to accurate and up-to-date data on their prices, promotions, discounts, etc.
It is important to note that the prices of your competitors are not always set in stone – they may be subject to change at any time, regardless of their pricing method. As such, you need to have a system in place that will allow you to track their pricing changes in real-time.
There are a number of different ways to collect competitor data, with price monitoring software being one of the most popular options. Such tools can help you track your competitor’s prices, as well as their promotions and discounts.
Rarely does it occur that companies air their pricing strategies and business objectives to the public long before entering the market, making it difficult for you to predict what their future pricing plans are.
Thankfully, market predictions complemented by historical data and expected production costs can help you anticipate your competitors’ moves. Having a price list of the entire industry gives you the power to accurately guess competitors’ moves, allowing you to outsmart them.
The competitive pricing strategy moves the importance of the brand value from the primary to the secondary position, assuming that customers value the price of the product more than the logo. This is especially true for products that are not unique and have many substitutes on the market.
For instance, a potential customer is more likely to buy a generic pain reliever than a branded one, as the former typically has the same ingredients and offers the same results at a lower price.
Thus, you may have to prepare to blend in with the competition and fight for every customer. One way to prevent that is to open your brand to a wider range of products or market them to high-end customers.
The level of consumer demand is one of the most important factors that influence your pricing strategy. As a rule, if the demand grows, it is only reasonable that you increase your prices accordingly.
Competitive pricing strategies can give you the optimal price for your product – meaning that you don’t go over the top and scare your customers away, but you don’t sell at a loss either.
For instance, when entering a new market segment, you may want to start with a penetration pricing strategy, that is, by offering your product at a lower price than usual in order to attract customers and build market share.
Once you have established your position and gathered the necessary sales data, you can turn towards the standard, higher prices, improve your profit margins, and regain the lost profits.
Competitive Pricing Examples
Competitive pricing strategies find their place in all areas of business, from retail to SaaS, and they can be divided into different categories.
In general, competitor-based pricing can be applied in three main areas:
Think about a scenario in which you want to enter a tech niche with two or three long-established players. Aggressive price lowering may not be a viable option, as you will have to sacrifice your own profitability in order to gain market share.
To avoid that, you can employ a competition-based pricing strategy – monitor the price throughout the market, match the lowest prices of your opponents, and use other means to boost customer value.
In a scenario in which you want to introduce your brand to new customers in an already crowded niche, you may want to employ a mix of premium and competitor-based pricing.
Offering prices close to those of your market opponents can already be a good way to attract attention and generate sales. However, it would be best if you could also add some extra value to your product in order to win over the more demanding customers.
Competitive pricing isn’t the best option when you want to introduce an exclusive product or service that hasn’t been yet seen on the market. In such a case, price skimming or penetration pricing may be a better option.
With that being said, you can still employ competition-based pricing – for example, by comparing to related market segments. While this won’t be as accurate, you will still get a general idea of the optimal price from the customer’s standpoint.
Benefits of Competitive Pricing Strategy
There are many benefits that come with conducting a competitive pricing analysis, including:
- Increased Revenue – By setting the right price for your product or service, you can increase your revenue and improve your bottom line.
- Improved Market Share – A competitive pricing strategy can help you gain market share and expand your business.
- Increased Customer Satisfaction – By offering the right price for your product or service, you can increase customer satisfaction and loyalty.
Disadvantages of Competitive Pricing Strategy
There are also some disadvantages associated with conducting a competitive pricing analysis, including:
- Less Time-Effective – Collecting data on your competitors can be time-consuming and often requires the use of specialized software over a longer time span.
- Relatively Costly – Hiring someone to conduct a competitive analysis can be costly, especially if you need it on a regular basis.
- Not Always Accurate – The data you collect on your competitors may not always be accurate or up to date.
To Sum Up
A competitive pricing strategy is an approach to setting prices based on the pricing methods of your competitors, with less attention put on the production cost and profit margins.
In order to be competitive, you need to have access to accurate and up-to-date data on your competitors’ prices. Price monitoring services can be a good way to collect it.
The main benefit of this strategy is that it can help you gain market share in an already crowded market and maintain reasonable business profitability.
The main disadvantage, however, is that it can be difficult to maintain in the long run; you need to keep an eye on your competitors’ prices at all times and be prepared to make changes to your own pricing strategy accordingly.
As even a small change in product price can affect sales significantly, you need to be very careful when making decisions about your pricing.
Manager with experience in leading team of software developers and testers during implementation of internal and external IT projects. Ceo of Brandly360.com.