Setting the right price for a product or service is crucial for every business. Optimal pricing can spur profits and growth. However, pricing too high can deter customers. And pricing too low leaves money on the table. Striking the right balance is key. This is where competitive pricing comes in.
What is Competitive Pricing?
Competitive pricing is a strategic pricing approach. It involves setting prices based on the prevailing prices of similar products or services in the market. The goal is to align your prices to match or beat the competition. This pricing strategy is extremely common across industries.
The idea behind competitive pricing is simple:
- Research and analyze competitor prices
- Set your own prices to match or undercut the competition
- Attract customers away from higher-priced rivals
Matching the going market rates ensures your offer remains appealing to substitutes. Undercutting gives you an edge as the lowest-cost provider. We will discuss specific competitive pricing strategies next.
Types of Competitive Pricing Strategies
Several pricing tactics come under the umbrella of competitive pricing. The most popular competitive pricing strategies include:
Price Matching
With price match software, a company sets prices identical to rivals selling similar items. The aim is to signal to customers that your product holds the same value. This strategy works well for commoditized products with little differentiation. Price becomes the prime decision driver for buyers.
Price matching discourages customers from shopping around for marginal better deals. It also thwarts other sellers from undercutting your prices.
Price Beating
As the name suggests, price beating means pricing marginally lower than competitors. This pricing strategy aims to clinch price-sensitive buyers who prefer the lowest market price.
A price-beating approach is often used to penetrate new markets or segments. It relies on lean operations and tight cost controls to allow lower profitable prices. The tactic also prompts rivals to lower prices, sparking a price war.
Value Pricing
Value pricing refers to setting prices based on the perceived value of your product versus substitutes. Here you benchmark competitor prices as a starting point. But the final price also factors the unique value of your offer.
If your product delivers greater value vis-a-vis rivals, you can price higher. The additional customer value justifies the premium over competitor rates.
Good-Better-Great Pricing
This approach offers customers a choice of three product variants:
- Good – Basic no-frills variant priced on par with competitor entry-level offerings
- Better – Mid-range variant with better features priced comparable to the competition
- Best – Premium variant loaded with best features and priced higher than the competition
The goal is to have a product line that spans the price spectrum. This lets you appeal to buyer segments wanting both basic and higher-end products.
Loss Leader/Penetration Pricing
Here, a company temporarily prices some offerings below cost. The aim is to attract a flood of customers and gain market share rapidly. Loss-making introductory pricing helps penetrate customer segments faster.
Companies usually raise prices later once they achieve market traction. Penetration pricing also serves as low-cost customer acquisition. Firms cross-sell or upsell other items to these buyers to turn profits.
Price Skimming
Price skimming sets high introductory prices for new products. The strategy targets buyers willing to pay more for early access, allowing firms to recover investments faster.
Prices are then lowered over time as adoption spreads to more price-conscious customer tiers. Apple and other tech brands use skimming for cutting-edge gadgets.
Predatory Pricing
This controversial tactic prices goods below sustainable costs to cripple competitors. The intent is to force rivals to quit the market or accept acquisition. Once competition is eliminated, the predatory firm hikes prices for windfall gains.
Antitrust regulators worldwide now prohibit predatory pricing abuse by dominant players. The strategy often backfires also by attracting new entrants lured by high margins.
Psychological Pricing
Psychological pricing uses buyer perceptions to maximize sales. For instance, setting prices at 99 instead of 100. The slight mark-down below round numbers makes items appear more affordable. Other psychology pricing tactics include charm prices (X.97) and quantity discounts (3 for10).
How to Set Competitive Prices?
Making competitive pricing decisions involves several preparatory steps:
- Identify key competitors: Who are the major rivals offering similar products? Track established players and new entrants.
- Determine competitor prices: Research the pricing across competitor product lines and brands. Account for discounts, sales, and promotions.
- Assess product differences: Evaluate unique features, quality variances, or service differences between your and competitor offers.
- Gauge customer perceptions: Understand how customers view the value of your offer versus substitutes.
- Estimate price sensitivity: Will lower or higher pricing sway target buyer decisions? Incorporate willingness-to-pay feedback.
- Calculate viable price range: Factor in costs, segment demand, and strategic goals to determine feasible pricing bounds.
- Set final competitive price: Pick a competitive price point aligning with industry norms and company objectives.
- Communicate pricing: Convey the competitive price positioning and unique value proposition to the target audience.
The above steps get you closer to an optimal competitive price. However, pricing must remain dynamic, balancing external realities and internal needs.
Benefits of Competitive Pricing
Adopting a competitive pricing strategy offers several advantages:
- Customer alignment: Your offer is more attractive to buyers if you match prevailing value expectations.
- Discourages competitor undercutting: Little incentive exists for rivals to price lower, as competitive prices.
- Market share growth: It is easier to get a share from competitors if the prices are aligned with the substitutes.
- Healthy margins: Competitive pricing helps you achieve your balance between profitability and customer appeal.
- Price benchmark: Your own pricing decisions are based on competitor rates.
- Sales growth: Beating competitor prices to penetrate new segments can increase revenues.
- Level playing field: Easy comparison shopping for a commodity-type product gets fairly priced.
Competitive pricing is a skill and it helps balance out key objectives: profitability, growth, and sustainability. But over the long term, it’s not enough to simply have smart pricing: you need to be constantly innovating your product, service, and business model.
Common Competitive Pricing Mistakes
Common Competitive Pricing Mistakes
While competitive pricing has merits, it also has pitfalls to avoid:
- No differentiation: Playing the price game without unique value props keeps profits elusive.
- Price wars: Unsustainable price cuts in pursuit of share gains destroy industry profits.
- Copycat pricing: Mimicking leaders without assessing their costs invites losses.
- Cost ignorance: Lack of cost knowledge leads to prices misaligned with profit needs.
- No customer insights: Forgetting evolving buyer needs makes prices uncompetitive over time.
- Static pricing: Keeping rigid price points despite market shifts is a recipe for decline.
- Irrational discounts: Non-strategic discounts train customers to expect lower regular prices.
Avoiding the above traps is vital for competitive pricing success.
The Future of Competitive Pricing
Competitive pricing will become even more volatile looking ahead. The more data and algorithms come into play with dynamic pricing; the more frequently prices will change throughout the industry.
Pricing decisions will also be impacted by pricing parity between online and offline channels. Mobile devices will provide instant price transparency to customers across sellers.
They will be pushing companies to assess competitive pricing more and more. To survive in today’s faster pace of price competition, agile price adjustments will be necessary.
Primarily, however, customer value perceptions, the alignment of costs with price, and communicating differences will remain at the core of effective competitive pricing. Only those companies that simultaneously master these timeless pricing fundamentals and embrace new technologies will lead markets.
Conclusion
Most businesses have a competitive pricing principle. Companies can benchmark competitor rates to price at a rate that matches buyer value expectations. It also deters competitor undercutting. Strategic contexts and market needs determine the different competitive pricing tactics that can be applied. However, playing solely the price game is usually not sustainable. Pricing has to be a hand-in-glove affair with delivering real products and services and differentiating from the long term. To stay ahead of the curve, we will need to avoid common competitive pricing mistakes and use dynamic data-driven pricing. The end result of competitive pricing is balancing value delivery with value capture. Those companies that get this balance right will gain and retain customers even as markets evolve.
