In order to streamline your sales funnel and marketing efforts, it’s vital to understand your customers’ purchasing buying habits. Pricing is the key element in this decision-making process, so it’s important to develop a pricing strategy that meets the needs of your customers while also providing a healthy return on investment for your company.
When it comes to pricing products and services, businesses often consider what their competitors are doing. This is known as competitor-based pricing, and it’s one of the most commonly used pricing models (which include, for example, value-based pricing or cost-plus pricing); it can be a helpful way to ensure that your prices are in line with the market.
This strategy is often used when there is little to no differentiation between the products or services offered by different companies.
Competitive pricing can be a useful tool, but it does come with its share of risks and disadvantages. To help you get a grip on the subject, the article below gets deeper into what competitor-based pricing is and when it can be beneficial.
Competitor-Based Pricing Strategy and Its Varieties
Competitor-based pricing (CBP) is the process of setting prices based on the prices of similar products or services in the marketplace. In some cases, businesses will use CBP as their primary pricing strategy. In other cases, they will use it as a supplement to other pricing strategies.
There are three main types of competitor-based pricing:
- Low-end pricing: This is when businesses price their products or services lower than their competitors. The goal is to attract price-sensitive customers who are looking for the best deal.
- High-end pricing: It refers to a strategy when businesses price their products or services higher than their competitors. The goal is to attract customers who are willing to pay more for a premium product or service.
- Match pricing: As the name suggests, it’s a competition-based pricing method in which businesses set a similar or the same price to match the prices of their competitors. The goal is to stay competitive and avoid losing market share.
What Are the Advantages of Competitor-Based Pricing?
There are several advantages to using competition-based pricing as part of your overall pricing strategy, including:
It Can Help You Stay Competitive
If you want to stay competitive in your industry, it’s crucial to keep an eye on your competitors’ prices. By monitoring their pricing strategies, you can adjust your own accordingly to ensure that you’re offering a competitive product or service.
It Can Help You Understand the Market
Keeping tabs on the prices of your competitors can also give you a better understanding of the overall market. This information can be helpful in managing your own prices and can give you insight into how customers are perceiving your offer and its value.
It Can Help You Avoid Being Underpriced
If you’re not aware of what your competitors are charging, you could run the risk of pricing your products or services too low. This could lead to lower profits and could make it difficult to sustain your business in the long run.
What Are the Disadvantages of Competitor-Based Pricing?
There are also some disadvantages to competitor-based pricing that you should be aware of, with the main ones being:
If all businesses in an industry are focused on undercutting the prices of their competition, it can lead to a race to the bottom. This can be especially harmful in industries where margins are already slim.
It Can Be Difficult to Sustain
Competition-based pricing can also be difficult to sustain over the long term. This is because it’s based on the prices of your competitors, which can fluctuate. This means that you could find yourself constantly having to adjust your prices, which would be time-consuming and confusing for customers.
It Can Be Risky
Another disadvantage of competitive pricing is that it may be risky. As you’re basing your prices on the average market price, you could end up overcharging or undercharging for your products and services. This could lead to lost sales and could damage your reputation.
It May Not Be the Best Option for Your Business
Competitor-based pricing may not always be the best option for your business. It doesn’t take into account your own costs or the unique value that your products or services offer. As such, it may not be the most profitable option for you.
When to Use Competition-Based Pricing Strategy
There are a few situations when using competition-based pricing may be the best option:
- You don’t have a competitive advantage: If you don’t have any unique selling points that give you an edge over your competitors, then the price may be the only thing you can use to attract customers.
- You’re entering a new market: If you’re starting up a business in a new market, then you may not have a lot of data on what customers are willing to pay. In this case, it may make sense to look at your competitors’ prices to get an idea of what the market is like.
- You need to respond to a competitor: If a competitor lowers their prices, you may need to respond in order to stay competitive. Otherwise, you may lose market share.
- You have little to no differentiation: If your products or services are very similar to your competitors’, then you may need to rely on price to attract customers. In these cases, competition-based pricing can be an effective way to compete.
- You’re in a commoditized market: In some markets (especially highly competitive ones), customers are only concerned with price. If this is the case, then you may need to use CBP to attract them with lower prices.
When Competitor-Based Pricing Strategy Shouldn’t Be Your Main Focus?
Competitive pricing can be a helpful tool, but it shouldn’t be your only pricing strategy. There are also a few situations when it may not be the best option:
- You have a competitive advantage: If you have a unique selling point that gives you an edge over your competitors, then you may not need to compete on price. In this case, you can focus on another pricing model that take your advantage into account.
- You have a high-quality product: If you have a high-quality product, you may be able to charge a premium price. In this case, competitive pricing strategy may not be the best option as you could end up pricing yourself out of the market.
- You’re in a niche market: In some cases, businesses in niche markets can charge a premium price as there’s little to no competition. If this is the case, then you may not need to focus on competition-based pricing.
- You have high costs: If your costs (e.g., production costs) are high, then you may not be able to compete on price. In this case, it may be better to focus on other pricing strategies.
- You’re in a highly regulated market: In some cases, businesses in highly regulated markets may not be able to use competition-based pricing. This is because the prices of their products or services may be set by the government.
How to Monitor Competitors’ Prices
If you’re going to use competitor-based pricing, you need to develop a consistent strategy, use accurate pricing data and choose suitable tools for monitoring the prices of your competitors and conducting competitive pricing analysis.
Here are a few tips on how to do this:
- Know your main competitors: The first step is to identify your main competitors. To do this, you need to understand your industry and the market you’re operating in. Once you know who your main competitors are, you can start monitoring their prices.
- Use multiple sources: It’s crucial to use multiple sources when monitoring competitor prices. This will give you a better idea of how your prices compare.
- Use relevant software: Price intelligence software and other similar tools can be helpful tools for monitoring competitor prices. This type of software can track prices across multiple channels and can give you real-time data on your competitors’ pricing strategies.
- Review your data regularly: It’s important to review your data regularly to ensure that you’re staying up-to-date with the prices of your competitors. This will help you to adjust your own pricing strategy accordingly and will ensure that you’re always offering a competitive price.
- Be flexible: Finally, it’s important to be flexible in your approach to competitive pricing. This is because your direct competitors’ pricing may fluctuate, and you may need to adjust your own prices accordingly.
In this day and age, it’s more important than ever for businesses to have a solid understanding of their pricing strategy. With so much competition out there, businesses need to find ways to attract and retain customers. One way to do this is by using competitor-based pricing.
Competitive pricing strategy can be a helpful tool, but it’s not without its risks. Before you use this strategy, make sure you understand the market and your own business’s capabilities. This will help you make the best decision for your company.
Here, at Brandly360, we offer individual consultation to make sure you choose tools tailored exactly to your needs and expectations.
Manager with experience in leading team of software developers and testers during implementation of internal and external IT projects. Ceo of Brandly360.com.