Competitive Pricing Strategy: Benefits and Disadvantages
There’s no doubt that pricing plays an important role in the consumer decision making process. But understanding the best prices to charge for your goods or services—no matter if you run an eCommerce website or a brick-and-mortar store—can sometimes be a challenge. This is especially true if you’re a new business owner tasked with pricing your products for the first time in a competitive market.
The prices you set for your goods or services influence nearly every aspect of your business, including things like your cash flow, profit margins, business expenses you can cover, and your products’ positions in the market—so choosing them wisely is critical for business scalability and staying competitive in your niche. Thankfully, there’s a tried-and-true pricing method that several businesses can turn to: competitive pricing.
If you’re unfamiliar with competitive pricing strategies, this guide is here to help you get a foothold. Below, we will break down just what competitive pricing is, it’s benefits and disadvantages, as well as show you some real-world examples of competitive pricing to help you get started.
What Is Competitive Pricing Strategy?
Competitive pricing is the process of strategically selecting price points for your goods or services based on competitor pricing in your market or niche, rather than basing prices solely on business costs or target profit margins. Competitive pricing is typically used by businesses that sell the same or highly similar products in the same market for an extended period, as prices of these products often reach a level of equilibrium.
3 Competitive Pricing Strategies
Using a pricing strategy based on competition, businesses have three choices when establishing prices for their goods or services:
- Lower Prices: The prices of your goods or services are lower than your competitors’ prices in your market. This strategy can be lucrative for businesses that are able to capitalize on economies of scale. Lower price points can also be used as part of a loss leader strategy. Frequently implemented by businesses entering a market for the first time, a loss leader strategy is a technique in which goods or services are set at a lower price point that’s not profitable but draws in new customers or enables a business to sell additional, more profitable goods or services to those customers.
- Higher Prices: The prices of your goods or services are higher than your competitors’ prices in your market. This strategy is used by businesses that offer goods or services with more features or benefits than their competitors. Higher price points are typically used by businesses that have a well-established brand reputation and provide a “premium” or “luxury” product compared to other businesses in their market or niche.
- Price Skimming: When businesses introduce a new product into the market, they can use price skimming as a competitive pricing strategy. Price skimming is the technique of charging the highest initial price that customers will pay when demand is high, and then lowering that price over time. Once as much revenue is made as possible and competition starts to enter the market, businesses can lower their product prices to attract new cost-conscious customers while staying competitive against competitors who are now producing similar products.
- Equal Prices: The prices of your goods or services are equal to your competitors’ prices in your market, or to the prevailing market price. Businesses that select equal price points to their competitors typically try to differentiate themselves by doing things like creating unique shopping experiences or offering more attractive product alternatives (e.g., using sustainable materials or manufacturing processes to attract eco-conscious audiences, etc.).
- Price Matching: When businesses are unable to collect, analyze, and act on competitor pricing data or fluctuations in a timely manner, price matching is another competitive pricing strategy. Businesses that offer price matching options for their customers can stay competitive in their market without having to closely follow their competitors’ pricing strategies, or constantly update their point of sale (POS) system or eCommerce store.
Benefits of Competitive Pricing
When equipped with comprehensive competitor pricing data, implementing a competitive pricing strategy can benefit your business in several different ways.
No matter if you’re starting a brand-new business or you’ve been selling in your market for years, increasing traffic to your store—be it eCommerce traffic or in-store foot traffic—helps you get your brand out there. Using a competitive pricing strategy, you can incorporate discount strategies and tactics such as offering a lower price than your competitors or implementing a loss leader sales campaign—both of which can help you attract more consumers, create more leads, and increase sales.
Prevent Market Share Losses
Competitive pricing strategies—especially those that implement pricing software to capture competitor data in real-time—enable you to analyze and react to pricing changes your competitors make on the fly. Not only does this help you make more strategic decisions in the long run, but it helps you prevent market share losses because you are able not only to anticipate and consider competitors’ prices dynamically, but also keep track of margin levels for the business. By always ensuring your prices remain market relevant, shoppers will be less likely to turn to your competitors and more likely to buy your business’ goods or services.
Boost Profit Margins
Selecting competitive prices for your goods or services doesn’t always mean taking profit losses. If your goods or services are priced lower than your competitors, there could be room for you to raise your prices while remaining competitive and boosting profit margins. This is especially true if your goods or services have a unique value proposition (UVP) compared to your competitors. A business may differentiate from the competition, if it can uncover and consider specific product attributes like different packaging, additional accessories to the product etc. that bring more value to customers and increase their willingness-to-pay. If it’s able to incorporate that information well into its competitive price strategies, then the pricing will be market relevant and profitable. Another way is to provide your customers with unique and frictionless shopping experiences, way better than those of the competitors.
Deploy Dynamic Pricing Strategies
Implementing a competitive pricing strategy is the first step to deploying a dynamic pricing strategy. Using a dynamic pricing solution, the prices of your goods or services are constantly adjusted in real-time based on changing variables like raw material costs, market demand, seasonality, inventory levels, freight costs, etc. These solutions will also provide you with visibility into pricing trends across several similar products within your market, as well as competitor pricing fluctuations. The ability to push the right prices on the market is especially important in eCommerce channels where buyers are able to research and compare similar products before they decide to engage with businesses and put in orders.
Disadvantages of Competitive Pricing Strategy
Pricing your goods or services competitively can also come with inherent disadvantages and risks. For example, if you focus solely on selecting prices for your goods or services based on prices your competitors set, you could have a difficult time covering manufacturing costs or your business’ overhead expenses.
What’s more, relying on competitor prices as your only source of truth for current prevailing market prices could be risky, as some of your competitors could have incorrectly priced their items. Establishing a comprehensive competitive pricing strategy can also be costly for newer businesses, especially when it comes to hiring pricing teams or deploying automated competitor price monitoring tools or dynamic pricing software.
Competitive Pricing Examples
To get a better idea of how you can incorporate competitive pricing into your business’ selling strategies, we’ve listed out a few examples below:
- Lower price strategy: Company A sells their model of wireless headphones for $150. Their closest market competitor, Company B, sells their similar model of wireless headphones for $140 to draw in cost-conscious consumers as they compare prices between different companies.
- Higher price strategy: Company A and Company B are the two largest competitors in the point-and-shoot digital camera market. A new brand, Company E, wants to break into the market and conducts competitor research. It finds that Company A sells their digital point-and-shoot camera with basic features for $350, and Company B sells their digital point-and-shoot camera with more advanced features for $425. Company E then decides to manufacture a “premium” digital point-and-shoot camera with even more advanced features and prices it at $500. While Company E’s price is higher, consumers can justify the additional costs because it offers more features.
- Equal price strategy: Company A is a popular brand in the bio-acetate sunglasses market. Company B wants to break into the market, so it conducts competitor research on Company A. It finds that Company A sells its bio-acetate sunglasses for $90. Using an equal price competitive pricing strategy, Company B decides to sell their similar bio-acetate sunglasses for $89 to entice customers into paying a “lower” price.
Ensure Your Prices Stay Competitive with PROS Platform
Implementing a successful competitive pricing strategy means you must have a streamlined way to gather and analyze data from your competition and your niche market—as well implement changes on the fly. Rather than constantly reviewing market price fluctuations or your competitors’ prices and making subsequent cumbersome adjustments to price lists, PROS Smart Price Optimization and Management software can help you streamline workflows and focus on making strategic pricing decisions, instead of manually collecting and analyzing information. Using cutting-edge artificial intelligence (AI), the PROS Platform enables you to deploy omnichannel pricing strategies that keep you competitive in real-time and prevent you from pricing pitfalls such as over-discounting or pricing inconsistencies.
Start making smarter pricing decisions today – learn more about the PROS Platform for Pricing Teams today.