Unraveling Competitive Based Pricing: Its Essence and Appropriate Application

By Thomas Bennett Financial expert at Priceva

Published on September 1, 2023

Competitor based pricing is a prevalent pricing strategy where prices are determined primarily by considering the prices of the competition. Understanding when and how to use the competition based pricing strategy can give a business the competitive edge in the market. This article explains the what, why, and how of competitor based pricing.

Table of Contents
Unraveling Competitive Based Pricing: Its Essence and Appropriate Application
What is Competitive Pricing?
Examples of Competition Based Pricing
Competition Based Pricing Advantages
Uncovering the Disadvantages of a Competitor Based Pricing
When to Use Competition Based Pricing
When Not To Use Competition Based Strategy
Constructing a Robust Competitor Based Pricing Approach
Alternative Pricing Strategies
How to Monitor Competitor Prices
Conclusion
FAQ

What is Competitive Pricing?

Competitive pricing, often termed as market-oriented pricing, is a pricing method where businesses set their prices in relation to the prices of their competitors. This strategy doesn't focus on production costs or customer demand, but primarily on how their competitors are pricing their products.

What are the types of competitor based pricing?

1. Below Competition Pricing: Here, businesses set their prices lower than their competitors, aiming to attract price-sensitive customers.

2. Parity Pricing: In this type, businesses set their prices equivalent to their competitors, trying to emphasize the other unique selling points of their products.

3. Above Competition Pricing: Businesses set their prices higher than their competitors, signaling better quality or exclusivity.

Examples of Competition Based Pricing

Walmart, a well-known retail giant, employs the below-competition pricing strategy. They offer products at prices lower than most of their competitors.

Most gas stations use parity pricing. Despite different brands, their prices rarely differ significantly.

Luxury brands like Louis Vuitton employ above-competition pricing. They charge a premium for their products to signify their superior quality and exclusivity.

Competition Based Pricing Advantages

Competitor based pricing offers numerous advantages that can help a business achieve its goals more effectively. Here are a few primary benefits:

It Can Help You Stay Competitive

Competitor-based pricing enables businesses to maintain a competitive edge in a highly saturated market. By keeping an eye on your competitors' prices and adjusting your prices accordingly, you can ensure that your offerings are always appealing to price-sensitive customers. This approach can help prevent customers from switching to competitors for cost reasons, hence maintaining your market share.

It Can Help You Understand the Market

Implementing a competitive pricing strategy can provide valuable insights into the current market trends and shifts in consumer preferences. Analyzing the pricing changes of competitors over time can reveal patterns and strategies that reflect market conditions. This information can guide your own pricing decisions and inform broader strategic moves.

It Can Help You Avoid Being Underpriced

Regularly monitoring competitor prices can prevent your products or services from being underpriced. If your prices are significantly lower than your competitors', it could lead to unnecessary profit losses. By adopting competitor-based pricing, you can make sure your prices are always aligned with the market, optimizing your profit margins while still providing competitive offers.

Uncovering the Disadvantages of a Competitor Based Pricing

While competitor-based pricing has distinct advantages, it's essential to be aware of the potential disadvantages associated with this strategy:

It Can Lead to a Race to the Bottom

One potential pitfall of competitor-based pricing is the danger of a 'race to the bottom.' If businesses keep undercutting each other's prices to attract customers, it can lead to significantly low prices that erode profit margins. This situation is particularly damaging in industries with high fixed costs and can ultimately threaten the overall profitability and sustainability of businesses.

It Can Be Difficult to Sustain

Competitor-based pricing, particularly when it involves consistently undercutting competitors, can result in a challenging situation to sustain over time. This strategy can squeeze profit margins, leaving businesses with little room to invest in other critical areas like product development, customer service, or marketing.

It Can Be Risky

Adopting your competitors' pricing strategies without a thorough understanding of their cost structure, target market, and overall business strategy can be risky. What works for one company may not necessarily work for another. If your competitors are setting prices that aren't profitable for them in the long run, following suit could lead to financial losses for your business.

It May Not Be the Best Option for Your Business

If your product or service is unique, high-quality, or premium, competitor-based pricing might not be the best strategy. Such products often warrant a higher price point, reflecting their distinctive value proposition. In this case, strategies like value-based pricing or cost-plus pricing might be more suitable.

When to Use Competition Based Pricing

Competition-based pricing is ideal for standardized products where there is intense competition, and customers are price-sensitive. It's also beneficial in industries where price plays a significant role in customers' purchasing decisions, like the retail industry.

When Not To Use Competition Based Strategy

It may not be wise to use competition-based pricing if your product or service is unique, has no direct competition, or offers significant value addition compared to your competitors. Similarly, it's not suitable for businesses targeting a premium segment where customers are less price-sensitive.

Constructing a Robust Competitor Based Pricing Approach

Developing a competition-based pricing strategy involves several key steps, each requiring careful analysis and strategic thinking.

Identify the Competitors in Your Market

The first step involves identifying who your direct competitors are. Look for businesses that offer similar products or services within the same geographical area. Make sure to consider both local businesses and larger, potentially online, competitors who target the same audience as you.

Research Their Pricing and Positioning Strategies

Understanding your competitors involves more than just identifying them. Dive deeper to analyze their pricing and positioning strategies. How much do they charge for their products or services? What unique selling propositions do they highlight? Do they position themselves as a cost-leader or a premium provider? This information will help you understand their strategy and how you might position yourself against them.

Average the Price of All Competitors

Once you've gathered all the necessary data, calculate the average price your competitors charge for each product or service. This will provide you with a benchmark to consider when setting your own prices.

Choose Higher, Lower, or Matched Prices

Based on your business goals, brand positioning, and the average price of competitors, decide on your pricing strategy. You may opt to set your prices lower to attract cost-conscious customers, higher to position your brand as a premium provider, or match the average competitor prices to maintain a neutral position.

Alternative Pricing Strategies

While competition-based pricing can be a powerful strategy, it's not the only option. Depending on your business model, target audience, and market conditions, other strategies might be more effective:

1. Cost-Plus Pricing

Cost-plus pricing involves calculating the total cost of producing a product or delivering a service and adding a predetermined profit margin. This strategy ensures that all costs are covered and a profit is made with each sale. However, it doesn't consider market conditions or perceived value, which can make it less optimal in competitive markets.

2. Demand-Based Pricing

Demand-based pricing, also known as dynamic pricing, involves setting prices based on the demand for a product or service. Prices increase when demand is high and decrease when demand is low. This strategy can maximize profits during high-demand periods but requires accurate demand forecasting.

3. Value-Based Pricing

Value-based pricing sets prices based on the perceived value of the product or service to the customer. Instead of considering costs or competitors' prices, this strategy focuses on the benefits the product or service provides to the customer. It can be highly profitable if your product or service offers unique benefits that customers are willing to pay a premium for.

How to Monitor Competitor Prices

Keeping track of competitors' prices is a crucial aspect of a competition-based pricing strategy. Here's how you can do it effectively:

1. Regular Market Research: Conduct regular market research to stay updated about your competitors' pricing changes. This can be as simple as visiting their websites or stores, or as complex as hiring a market research firm.

2. Industry Reports: Subscribing to industry reports is another good way to keep track of price trends in your industry. These reports often provide a broad overview of pricing trends and can provide insights into how your competitors are pricing their products.

3. Price Monitoring Software: There are various price monitoring tools available that can automate the process of tracking competitors' prices. These tools can provide real-time updates and make it easier to analyze pricing trends.

Conclusion

While competitor-based pricing has its advantages, it's not suitable for every business or every situation. Businesses must consider their market position, customer preferences, and overall business strategy before adopting this pricing strategy. However, when used wisely, competitor-based pricing can help businesses stay competitive, understand the market better, and make more informed pricing decisions to maintain market share. At Priceva, we provide tools and insights to help businesses implement effective pricing strategies. Get in touch with us to learn more!

FAQ

Can You Give an Example of Competition Based Pricing?

A notable example of competitor based pricing strategy is Walmart. The retail giant strategically prices its products lower than most of its competitors, aiming to attract price-sensitive customers. This 'Everyday Low Prices' strategy is a key part of Walmart's brand identity.

What Does a Competitor Based Pricing Strategy Entail?

A competition pricing strategy involves setting the price of a product or service based on what competitors are charging, rather than focusing solely on costs or demand. This approach requires a deep understanding of the market and regular monitoring of competitors' pricing.

What Are the Benefits of Competition Based Pricing?

Competition based strategy can help businesses stay competitive, gain a better understanding of market trends, and avoid being underpriced or overpriced. It's an effective strategy for industries where products or services are similar and customers are price-sensitive.

What Are the Three Kinds of Competitive Pricing?

The three types of competitive pricing are:

1. Below-Competition Pricing: Setting prices lower than competitors to attract price-sensitive customers.

2. Parity Pricing (or Matching Pricing): Setting prices at the same level as competitors.

3. Above-Competition Pricing: Setting prices higher than competitors, often to convey a sense of premium quality or superior service.

Why Might a Business Opt for a Competitor Based Pricing Strategy?

Businesses may choose competition based pricing in highly competitive markets, where products or services are largely standardized, and customers are highly price-sensitive. This strategy allows businesses to position themselves strategically based on price, which can be a powerful differentiator in such markets.