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What is competitive pricing?
How does it work in simple terms?
In this article, I will break down the meaning of Competitive Pricing so you know all there is to know about it!
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What Is Competitive Pricing
Competitive pricing is a type of pricing strategy where a company establishes a specific price for its products and services relative to its competitors.
Typically, companies that adopt competitive pricing offer similar products and services.
A company can choose to set a price either below its competitors, at the same level, or above the competition.
The pricing strategy can influence potential clients depending on the company’s positioning in the market.
For instance, if you set your price below that of the competitors, your objective is to beat the competition on price.
However, if you set your price above that of your competitors, you may be looking to establish yourself as offering a premium product or service.
This type of pricing strategy is more effective in markets where the price has reached an equilibrium and prices have reached a stable point.
Competitive Pricing Strategies
A company can set the price for its goods and services in relation to that of its competitors.
In essence, you can set your prices in three different ways: at the same level as your competitors, below your competitors’ price, or above.
When a company sets its price at the same level as its competitors, its objective is to ensure that it does not misprice its products and services.
However, to attract clients, the company will still need to focus on key differentiating factors allowing clients to select their products and services over that of the competition.
When a company sets its price below its competitors’ prices, it is looking to attract its clients based on better prices.
In some cases, some companies will deliberately set their prices so low that they incur a financial loss for some time, allowing them to increase their market share.
Finally, when a company sets its price above the price of its competitors, it is looking to position itself as a premium provider.
Typically, the company will focus on key features justifying why clients need to pay more than the competition to purchase their products and services.
In many cases, companies will focus on the quality of their product or other features that are not related to price.
Competitive Pricing Advantages
Companies have many advantages in setting their prices relative to that of their competitors.
Depending on your positioning strategy in the market, your pricing strategy can directly impact how clients interact with your business.
For example, if you’re looking to penetrate a new market, you may want to set a very low price point to gain market share.
On the other hand, if you’re looking to build your brand, you may want to set your price above your competitors to show the market that you have something better to offer.
Another benefit of competitive pricing is that it’s easy to adopt for most companies.
Very often, the competition’s prices are publicly known.
As a result, you can take their published prices and set your prices accordingly.
Another advantage is that this pricing strategy does not expose the business to many risks.
The idea is if the competitors can maintain a profitable business or scale at their current price point, if you set your price relative to that, you should generally be as profitable as well.
Competitive Pricing Disadvantages
Although competitive pricing can be effective in certain markets, you should also be aware of its disadvantages.
The first drawback is that competitive pricing may not work well if the products and services offered by the competitors are not the same as yours.
This is referred to as the product or service “congruency”.
If consumers and clients do not perceive two products as congruent, then differentiating on price alone may not be an effective strategy.
Another drawback is determining the competitors against which you are setting your prices.
Are you competing against brick-and-mortar, e-commerce, or other types of businesses?
If you want to set your prices according to the competitors, you should have a very good idea of who your competitors are.
Another disadvantage of competitive pricing is that for some companies, it is difficult to find information on the competitor’s prices.
In other words, the market operates in such a way that the competitors keep their prices confidential and even sign confidentiality agreements with their prospects, so they do not share information with other vendors.
As such, it’s important to have the right data to be able to make informed business decisions.
Competitive Pricing Limitations
Competitive pricing does have limitations.
In certain situations, if companies operating in a certain market set their prices in relation to that of the others, they may ultimately set a non-optimal price for their products and services.
Every company is different, has a different capital structure, different production costs and so on.
As such, a company may set its price in relation to its competitors in such a way that it does not generate any meaningful profits or may even suffer a loss.
Also, competitive pricing is a type of strategy that is used by almost every company out there.
If everyone adopts the same strategy, you may not be able to differentiate yourself properly.
Another limitation is that when companies set their prices relative to their competitors, they may race to the bottom or race to the sky.
In other words, when the companies are constantly setting their prices lower and lower, they will eventually be selling at a loss without translating the additional sales into profits.
Conversely, if the competitors are constantly looking to set prices higher than others, the companies may set unrealistic prices that the market does not accept, leading them to lose sales.
Competitive Pricing Example
Let’s look at a competitive pricing example to illustrate the concept better.
Let’s look at the automotive industry where you can see competitive pricing.
A car manufacturer can choose to sell its automobiles either at the same price as the competitors, lower, or higher.
When the automobile is sold at the same price, the automaker will want to differentiate itself by showing that it is potentially offering more services, more features, or better quality.
When the automaker is selling its cars below that of the competitors, it is looking to attract consumers who are price sensitive.
The idea is to sell the same product at a better price.
Automakers can also choose to set their prices above others to position themselves as a prestige or premium automaker.
When someone pays more to buy a car, they are paying a premium, perhaps for the quality, the brand, or other extra features, the other car makers do not have.
What Is Competitive Pricing FAQ
What is competitive pricing?
“Competitive pricing” is a popular type of pricing strategy where a company will set its prices based on what the competitors are doing.
A new market player may choose to offer its products and services at a lower price to penetrate the market.
A more established company can choose to set its prices above the market as it may offer better quality or other features the competitors do not have.
Why should companies adopt competitive pricing strategies?
Companies adopt a competitive pricing strategy for different reasons.
For instance, a company may want to keep its customer base by setting prices relative to its competitors.
Another company will use the competitor’s prices to price itself when entering a new market.
Also, a company may want to position itself in the market in relation to its competitors to either offer the best prices, offer more for the same price, or offer premium products and services.
What are the different types of competitive pricing?
There are three main types of competitive pricing: low price, high price, or matched price.
Low price is when you price your goods and services below your competitors.
High price is when you deliberately set your price above the market competitors.
Matched price is when you set your prices to be equal to that of your competitors.
So there you have it folks!
What is competitive pricing?
In a nutshell, competitive pricing is a pricing strategy where a company sets its prices relative to its competitors.
In theory, all companies selling the same product or service should sell them at the same price.
As a result, when you set your price to be equal to that of your competitors, you are setting your price at the market equilibrium price point.
However, you can choose to set your price above or even below that of the competitors to position yourself differently.
Now that you know what competitive pricing is and how it works, good luck with your research!
I hope you enjoyed this article on Competitive Pricing! Be sure to check out more articles on my blog. Enjoy!
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