Strategic pricing approach that companies set prices at the price of other similar or substitute products in the market. It is to make sure prices are competitive to rival and win market share while still being profitable.
Many industries use competitive pricing, ranging from retail and consumer goods to business to business markets. This is a very important pricing strategy for companies in the market with competitive environment and price sensitive customers.
What is Competitive Pricing?
Market oriented pricing or competitive pricing is the pricing strategy wherein prices are set almost entirely on the basis of prices set by competitors for similar products and services in the market. Companies compare what they are charging their customers to what their competitors are charging customers and price their products at a similar level.
The core rationale behind competitive pricing is that customers will view a product as providing good value if its price points are in line with alternative offerings in the market. If a price is much higher than competitor products, customers may opt for the cheaper alternatives. This is why ongoing competitor price tracking is crucial for businesses to remain competitive and adjust their pricing strategies accordingly.
There are several key factors companies consider when setting competitive prices:
- Competitor prices – This is the most direct factor. Companies track competitors’ prices closely and aim to price match or undercut when possible.
- Customer perceptions of value – The price should align with the value customers feel they get from the product.
- Cost of production – Companies must consider their profit margins when aligning prices with the competition.
- Stage in product life cycle – Competitive pricing approaches may differ depending on whether a product is newly launched or well-established.
How to Use Competitive Pricing
Putting a competitive pricing strategy into action involves several steps:
Conduct Competitor Analysis
Thorough research of competitor products and prices they charge customers. Then it is about compiling a price list across the competitors and segments. Find out what competing products are most similar to yours, and what the closest price benchmarking is.
Determine Pricing Objectives
Decide on clear pricing goals aligned to wider business objectives. Typical competitive pricing goals include:
- Achieve market share in a competitive market.
- To remain price competitive, we must match competitor prices.
- Attracted switchers away from rivals by undercutting competitor prices.
Set Prices
This helps set your initial prices at close to the same or slightly lower than your direct competitors products. Make sure you know what production costs are and what profit margins you want to hit.
Adjust Prices Dynamically
Know how track competitor pricing moves and changes in customer demand. You need to be ready to very quickly fine tune pricing to match or beat competitor price changes. You need to stay competitive and use promotional discounts, bundles and financing options.
Benefits of a Competitive Pricing Strategy
Setting prices based on the wider market landscape has several advantages:
Drives market share growth. Keeping prices aligned to alternatives in the marketplace encourages customers to choose your product over competitors. Matching or beating prices can lead to increased sales and erode competitor’s market share.
Attracts price-sensitive customers. A competitive pricing approach appeals specifically to price-conscious shoppers that compare options side-by-side. These customers are won over by good value pricing.
Discourages competitor entry. Existing players may be disincentivized from entering a market where competitive pricing is aggressively used by incumbents. New entrants would struggle to match established price points.
Provides pricing discipline. Benchmarking competitor prices enables a company to price its products appropriately based on real market data instead of guesswork or arbitrary formulas.
Who Uses Competitive Pricing?
Competitive pricing is extensively used across industries, including:
Retail industry. Retailers often employ competitive pricing against rival retailers. Walmart is renowned for its low-price strategy driven by undercutting competitor prices.
Consumer tech. The intensely competitive consumer tech space leads players like Samsung and Apple to closely match flagship smartphone and tablet prices.
Airlines. Budget airlines like Ryanair use yield management systems to adjust fares based on competitor prices on specific routes.
SaaS companies. New SaaS entrants will initially peg prices to incumbent players while seeking to differentiate their offerings over time.
For instance, in order to prepare for the holiday season, Amazon expected price increases to affect almost 80 million goods in November 2014. A price-matching agreement was established by Walmart and Best Buy, among other shops. This mitigated the danger of Walmart or Best Buy consumers switching to Amazon just for price-related purchases by giving them access to a product at a cheaper cost.
Challenges with Competitive Pricing
While matching or beating competitor prices can be an effective strategy, pricing managers should be aware of some potential pitfalls:
Race to the bottom on prices. Aggressively undercutting rivals often spark a race to the bottom across the whole market, destroying profitability.
Lack of differentiation. Customers that buy only on price may lack loyalty to any brand, frequently switching between competitors.
Price wars. Attempts to undercut competitor pricing can trigger prolonged price wars that benefit no players in the market.
Anti-trust issues. Collectively agreed uniform pricing across an industry may violate anti-trust rules in some jurisdictions. Companies need to set pricing independently.
Overcoming Competitive Pricing Challenges
However, there are ways for companies to address these issues:
Avoid unsustainable price wars. Set price floors below which prices will not be lowered to prevent an unprofitable race to the bottom.
Differentiate beyond price. Seek product differentiation through quality, features, and service to avoid competing solely on price.
Use non-price levers. Leverage promotions, financing, bundles and sales to stay competitive when brands limit price discounting.
Monitor changes quickly. Rapid price monitoring software ensures companies can respond quickly to competitor pricing changes.
Conclusion
Companies in crowded markets trying to attract customers in a profitable way will still have to rely on competitive pricing as a strategy. The strategy involves fine tuning prices to the competition that assesses the ability to grow sales without breaking the margin objective.
Competitive pricing is a must, but those implementing it must be careful to avoid destructive industry wide price wars and to differentiate beyond just price to achieve true competitive advantage. But competitive pricing still works well — judiciously.
