![How to Create a Competitive Pricing Strategy [With Definitions and Benefits]](https://cdn.prod.website-files.com/60d08d8f7ed64b84fb3552cd/6717800df379ee00800bff15_188.png)
Shopping, whether online or in-store, entails a lot of comparisons.
Savvy shoppers want a good deal and will do their due diligence to ensure they get it. They will inevitably compare prices before deciding to check out and turn over their hard-earned money.
It doesn’t matter if your product is the best in its category. Without the right prices, customers will choose the most appealing price and skip your product.
The actual product cost plus profit margins is not a solid barometer for arriving at the best price, but neither is undercutting your competitors.
The lowest price doesn’t necessarily make for the most attractive product.
How, then, can you turn the tides in your favor?
Two words: competitive pricing.
You need to check your competition and the market before pricing your products.
You can create a competitive pricing strategy by following these guidelines. We’ll explore how competitive pricing strategy works, its benefits, and some examples of how this can apply to you.
Ultimately, you can use competitive pricing to drastically increase profitability and simplify the process of pricing your products.
Understanding Competitive Pricing Strategy
What is competitive pricing?
Investopedia defines competitive pricing as “the process of selecting strategic price points to best take advantage of a product or service-based market relative to competition.”
In simpler terms, a competitive pricing strategy, also known as competition-based pricing, is not based on production costs or market demand.
Instead, it takes into account the prices of competitors and sets prices below or above them, therefore using competitors as a benchmark.
QUOTE: Pricing below your competitors also works if you expect your customers to buy additional products from you once they set foot in your store and are familiar with your brand.
Pros and Cons of Competitive Pricing
Pros
Competition-based pricing can boost profits when executed well. Here are some of the benefits of this type of pricing.
It’s simple and easy to implement
Competitive pricing doesn’t take a lot of know-how to do correctly. You only need to know who your competitors are and how much they’re selling their products for.
It does take some research and analysis to arrive at the optimal price for your business but relative to other strategies, it’s straightforward and doesn’t suck up precious time and resources.
It helps you meet customer expectations
If you price your offerings below or at the same level as your competitors, you become a more appealing option to customers who look for value.
Better prices attract more customers, in theory. Competitive pricing gives you a competitive advantage.
It may increase customer loyalty and market share
Another advantage is it can make customers more loyal to your business and increase market share. An uptick in customers leads to more sales and revenue.
You can also enter the radar of customers who might otherwise not be aware of your brand. Lastly, competitive pricing encourages repeat purchases and customer loyalty in the long run.
Cons
That being said, competition-based pricing has its downsides that you need to consider before you go all-in on this pricing model.
It can be difficult to implement if you have many competitors
Say you have hundreds of products and dozens of competitors. It will be too time-consuming to consider all these price points and competitor prices can fluctuate.
On top of that, it’s harder to stand out in a crowded market and a race to the bottom can ensue if you strive to keep prices low.
You can lose sight of other important factors like brand perception
Price isn’t the only consideration if you want to appeal to more customers. By being too laser-focused on your competitors, you neglect aspects like your brand’s value proposition and identity.
Also, remember that your competitors’ prices can also be ineffective for them so they shouldn’t be the sole basis for your pricing.
You can be at risk for huge profit losses
Lastly, lowering your prices can cut into your profit margins and even your products’ quality (if you struggle to cover basic costs).
This applies especially to small businesses and businesses with expensive production costs. Their budget will be stretched too thin and may not be able to recoup their losses.
Examples of Competitive Pricing Strategies
- Amazon
If you want a prime example of a competitive pricing strategy, look at Amazon’s model.
It’s heavily competition-based as they constantly track competitor prices and use software to adapt their price accordingly to stay competitive.
This strategy has done wonders for Amazon and has led to its reputation as a low-cost provider of any product you want.
It naturally attracts shoppers on a budget and looking for a good deal and lots of value.
- Airlines
Similarly, airline companies use technology to glean data about their competitor’s prices. If they see that a competitor airline has a lower price on a route, they will match or lower their prices in response.
They use sophisticated technology to monitor these prices so they always remain an attractive option for travelers.
Types of Competitive Pricing Strategies
Below the Competition
In a competitive pricing model, it’s common to set prices below the competition even if this means you have a lower margin.
If you are striving to make a name for yourself in your industry, it’s a useful strategy to be at a loss, at first, and then raise prices as you build up your reputation.
Pricing below your competitors also works if you expect your customers to buy additional products from you once they set foot in your store and are familiar with your brand.
Above the Competition
Conversely, you can set your prices higher than the competition if you want to emphasize that your product quality is superior or want to establish yourself as an upscale option.
You can also use this strategy if you are introducing a new or improved product in the market that is seen as superior to your competitor’s product.
Match the Competition
Lastly, you can match the prices of your competitors. Businesses do this when their product has the same features as the alternative products on the market.
This strategy however requires that you highlight the other things your product and business offers. For example, you may provide free shipping, excellent customer service, or white glove delivery.
On the other hand, you can also do a price-match guarantee where you offer to match the prices of your competing products that are priced lower. This appeals to people who want the most affordable option.
How to Implement a Competitive Pricing Strategy
1. Research your competitors
First, you need to identify your competitors, both direct and indirect.
Direct competitors offer the same or similar products while indirect competitors share your target market but don’t offer the same products. Instead, they offer products that fulfill your customers’ needs differently.
2. Look at your competitors’ prices
Next, scope out your competitive landscape and do a market analysis. Go over your list of competitors and research their prices and market share.
Dig deeper into their products and how they’re different from your offerings. Collect data on your competitor’s prices and price changes through Panoramata or a similar platform.
Consider value-adding aspects like discounts, bundles, and other promotions that impact their product.
You can also track prices by going to your competitor’s website and signing up for industry newsletters.
To take it a step further, conduct a thorough analysis by monitoring their email newsletters, social media, ads, and landing pages.
3. Research brand perception
Look at how your competitors’ brand is perceived by your target audience compared to your brand. This is a big factor to consider when pricing your products.
If your potential customers view your competitor’s brand in a better light than yours, it will be hard to justify charging higher prices.
Use customer interviews, surveys, and social listening tools to collect information on brand perception.
4. Define your goals
Before you implement a competitive pricing strategy, you need to set clear goals. These include:
- Have a bigger market share
- Increase profits
- Boost sales
- Break into a new market
5. Settle on a price
Next, it’s time to implement your new pricing strategy. Make sure you’ve assessed everything from your competitor’s brand perception to your production costs, margins, distribution, etc.
Choose the price that suits you and your goals.
6. Monitor competitors and adjust prices as needed
Keep your insights fresh by regularly monitoring your competitors’ prices on Panoramata. The market moves swiftly so you need to match its pace.
Adapt your pricing to changes in prices, brand perception, trends, and customer reviews. Regular tracking ensures that you have your finger on the pulse of the market.
Establish competitive prices and beat the competition
In summary, competitive pricing is based on the prices of your competitors. You can raise, lower, or match the prices of your competitors.
However, this pricing strategy has its pros and cons. It may not apply to small businesses with high production costs.
To create a competitive pricing strategy, you need to analyze your competitive landscape and collect data on your competitors’ offerings.
Lastly, regular monitoring (including ads, emails, funnels, and product launches) is crucial if you want your pricing strategy to reflect the market trends and customer preferences.
Frequently Asked Questions
1. What is a competitive-based pricing strategy?
A competitive-based pricing strategy sets your prices based on what competitors are charging for similar products or services. This helps you stay competitive in the market while appealing to price-conscious customers.
2. How do you create a competitive pricing strategy?
Start by researching your competitors’ prices, analyzing your target audience’s willingness to pay, and understanding your costs. Then, adjust your pricing to match or strategically undercut competitors while ensuring profitability.
3. How do you come up with a pricing strategy?
To develop a pricing strategy, consider factors like production costs, market demand, competitor pricing, and your brand’s value proposition. Choose a pricing model that aligns with your business goals, whether it’s cost-based, value-based, or competitive pricing.
