Competitive Pricing Guide: Strategy, Advantages & Disadvantages

By Thomas Bennett Financial expert at Priceva

Published on June 16, 2022

Any effective pricing strategy is built on thorough competitor research. When you are aware of how the top market players manage to satisfy customers and maintain a stable profit inflow, you can make timely corrections to your own pricing policy. At the same time, if you’re not matching with your customers’ pricing expectations, your company won’t survive over the long term.

Competitor-based pricing is one of the best tools for finding this golden middle between what you want to charge and how much consumers are ready to pay. Knowing how competitors craft their pricing tiers, what strong points they emphasize, and what is used as a core value metric allows you to elaborate your own pricing more effectively. Today, we will cover the ways of creating a competitive pricing strategy and how to perform thorough research for making informed decisions.

Table of Contents
Competitive Pricing Guide: Strategy, Advantages & Disadvantages
What's Competitive Pricing?
Cost-plus Pricing Strategy
Demand Pricing Strategy
Penetration Pricing Strategy
Competitive Pricing Strategy
Pros and Cons of Competitive Pricing
How to Perform Competitive Pricing?
Conclusion
FAQ

What's Competitive Pricing?

When forming prices, some sellers start with an easy-to-implement cost-plus strategy: one only needs to add a markup amount to the production expenses. However, practice shows that this approach is not efficient enough because it ignores a multiude of other important factors, including competitors’ quotes. That’s why sellers sooner or later resolve to a more dynamic pricing formation method.

Competitive pricing is the process of choosing the most optimal prices for your products based on competitor pricing in your niche, as opposed to relying on business costs or planned profit margins. This is a common practice among businesses that offer the same or similar products.

Competition-based pricing boils down to defining the cost of products and services depending on what the competitors are charging.

Retailers have many competitors to keep an eye on and they should be able to respond quickly to rivals’ price changes. This is why many companies leverage a competitive pricing strategy with the help of automated price tracking solutions rather than performing a manual analysis. Automated pricing data collection tools are often used by sellers to explore:

The cheapest products on the market;
Average positioning where the majority of same-type products are clustered;
The highest pricing that’s typically used by luxury brands.

Before we get down to describing the peculiarities of competitive pricing, let’s quickly observe other popular strategies so that you could see the difference and decide what may work best for your business model.

Cost-Plus Pricing Strategy

Also called ‘markup pricing’, this method involves adding a fixed percentage to the unit cost (what it takes to produce the product). The result is the selling price of the item. Such an approach ignores pricing set by competitors, so it’s not the best solution for many businesses in highly competitive niches.

Also, cost-plus pricing isn’t efficient for selling software because the value of your products might be more significant than what it takes to develop the product. However, the method works well for businesses that stick to the cost-leadership price strategy. The latter often implies that retailers don't charge more than X% for their products, and this transparency helps them build a trustworthy and reputable brand.

Demand Pricing Strategy

Demand-based pricing means defining the cost of an item based on customer’ demand and perceived value. As opposed to fixed prices, this method implies changing the quotes in response to low or high demand.

For example, this approach is often used by swimwear stores where demand cannot be consistent all year round. In summer (when most people go on vacation), swimming suits are more expensive, while the rest of the clothing is sold at discounted prices during wintertime.

There are several ways to organize a demand pricing strategy:

Price skimming involves charging more at the stage of product introduction, when consumers are willing to buy, and reducing prices when demand gets lower. This strategy is often exploited by creators of novel technologies. As competitors come up with their own alternatives, innovators have to adjust their prices and adapt.
Value-based pricing means that the cost of a product is based on how much consumers think it’s worth. We can see that happening with luxury items - customers are ready to pay for a brand name.

Penetration Pricing Strategy

Penetration pricing is the process of attracting an audience by undercutting the value of the initial offering and setting low prices. This is done for introducing a brand or product to consumers and showing the value of the product relative to competitors. With this pricing strategy, a company captures attention and strives to retain customers even if prices rise.

This method works well when there’s little product differentiation and when it’s suitable for mass market and, therefore, a scalable economy. It is commonly used for retail goods such as groceries.

We have reviewed ‘skimming’ and ‘penetration’ methods that are based on deviations from the average price, so their outcomes may be harder to predict. Besides, they are mostly applicable to new products, but what about older ones? Here comes the retailers’ favorite - competitive pricing.

Competitive Pricing Strategy

Since the number of offers in the retail market keeps increasing, competitive pricing is one of the most widespread methods. In this case, decisions are based on the purchasing behavior of customers. When the product is a part of a well-established market, and you have many competitors and substitutes around, pricing changes can be a great factor driving your growth.

By ensuring that your prices are agreeable for customers, you have more chances of making them choose your store, not competitors’.

Most often, a competitive pricing strategy is actualized through the Equal Price approach. Followers of this strategy gravitate towards the golden medium between competitors’ quotes.

‘But if every retailer charges one and the same sum, how do businesses differentiate themselves then?” - you may ask. That’s a good question.

Indeed, medium prices look less attractive than the cheapest ones, but a competitive advantage is reached through active marketing or better shopping experience. When prices are equal, the customers’ focus shifts from the cost to the brand and its service. For example, a retailer can offer free delivery, gifts, discounts for next purchases, and so on.

Competitive Pricing Examples

Here’s how you can implement a competitive pricing strategy:

If you run a large retail network, you can offer lower prices than the manufacturer by negotiating a lower price for wholesale purchases. Hence, customers are more likely to buy a product from you.
You’ve got equal prices? Offer your customers an extended window for returns or a dedicated customer service representative to answer questions and resolve issues after purchase. That will give you a competitive advantage.
Even a higher price can be justified if you include free delivery, provide personal recommendations for customers and some extra perks.

Pros and Cons of Competitive Pricing

Advantages of Competition-Based Pricing

This strategy will be your first step in finding the best possible selling price for your goods. Detailed market research serves as a great foundation for making informed decisions. Here’s why you should consider competitive pricing:

It’s easy. This pricing strategy is not hard to calculate and understand. All you need to do is collect the competitor data and figure out the most optimal pricing for your goods based on that. From this point, you can decide where to go - reduce or raise the price.
Minimal risk. When you keep prices close to competitors’, your customers know what to expect. You, in turn, know which pricing range is agreeable for your audience.
Efficiency. You can combine competitive pricing with other pricing strategies to maximize the benefits. For example, its results can be enhanced by in-depth market research.

Disadvantages of Competition-Based pricing

When you’re trying to figure out the optimal pricing for your goods, you should be able to connect their value with the cost. Failing to do so may result in losses. Competitive pricing also bears the following risks:

You may dismiss consumers’ needs. When sticking to competition-based pricing, some companies make a serious mistake: they consider only competitors’ actions but not consumers’ demand and preferences. If the latter aren’t reflected in the prices, the strategy can fail in the long run.
Lower flexibility. While highlighting the importance of prices, you may overlook ever-changing factors, such as the cost of production, demand, products’ added value and customers’ willingness to pay.

How to Perform Competitive Pricing

Although a competitive pricing strategy is an easy way to establish optimal prices for your products, implementing it can be challenging. It’s particularly troublesome when your team has to perform price analysis manually. To save them time, you should consider automated tools. Here’s how they can help you in two big steps:

Analyze competitors’ prices. Comparing 100 products on several websites manually can take around 10 hours, so why not assign this task to a machine? Consider the repricing software by Priceva - it crawls websites to provide relevant pricing data and perform a thorough competition analysis.
Define your product’s price. After collecting the information, you need to make a decision. The rule-based repricing software by Priceva can help you figure out an optimal price. It will suggest a better price for each individual product, allowing you to adjust the cost manually or automatically.

By using repricing software, you can save a lot of time and make informed decisions. Plus, it’s the key to dynamic pricing, which allows you to update costs depending on competitors’ actions.

Conclusion

When defining a product’s price tag, you should take into consideration multiple aspects, and one of the most important points is price. Staying aware of competitors’ quotes allows you to get a fuller picture of the market and decide on the optimal price for your goods. However, before you leverage a competitive pricing strategy, make sure it suits your business niche and doesn’t conflict with the deserved value of your product.

FAQ

What determines competitive pricing?

This approach means a company takes into account competitors’ prices and adjusts the cost of its goods accordingly.

What are the three types of competitive pricing?

First, you can keep the price above the competitors’ prices, but offer more features or an improved item. Second, you can keep prices below competitors’, allowing customers to save. Third, you can maintain equal pricing but your products should have some added value (better quality, free shipping, etc).

Why do businesses choose competition-based pricing?

This approach allows them to keep an eye on their competitors and come up with better solutions that satisfy customers. Also, price intelligence keeps the retailer in tune with market pricing trends.

How does competitive pricing affect manufacturers?

Although competitive pricing has many positive aspects for end consumers, manufacturers should be aware of price wars. Companies that stick to the competitive pricing approach tend to ask for lower wholesale prices, which is not profitable for manufacturers. At the same time, it’s impossible to keep lowering production costs for long - that directly impacts the quality of production.

What companies use competitive pricing?

Competition-based pricing is a common practice among retailers. This strategy works well when the market is flooded with similar goods, so price changes are one of the major ways to differentiate between products. Clothing, grocery, electronic appliances - these are a few of many spheres where competition-based pricing works well.