The ABCs of Competitive Pricing Strategy: Definition, Advantages, and Examples Explained

Choosing a price point is one of the biggest dilemmas business owners face! You want to pick a price that gives you a decent profit margin, making your business financially viable. But you also want to keep your product within your customer base’s budget. 

Then bringing competitors with similar products into the pricing decision, it gets even more complicated. You can beat their price and undercut them, price match, or charge a higher price to portray the value of your product.

With so many options and an increasingly competitive business environment, choosing the right competitive pricing strategy is essential to attracting and retaining customers in your small business.

What is a competitive pricing strategy?

First what exactly is meant by a competitive pricing strategy? It involves intentionally deciding on a pricing method for the business to maximize profitability and market share, finding the balance between profit margins and attractiveness to your customer base. How you set prices for your products has the power to increase sales or drive potential customers to competitors’ products.

When choosing between pricing models, look within the business (at costs, targets, positioning, etc), look at competitors’ prices for comparison to see where you could establish a competitive advantage, and do some market research into your customer base and how they make purchasing decisions. For example, do they prioritize getting a good deal, making lower prices a good choice, or do they value a premium product, meaning you could go for a higher price point? This will give you the insight you need to make an informed decision about product prices.

7 Competitive Pricing Strategies

There’s more than one way to make your product pricing competitive. Here are some of your options.

Competition-Based Pricing

This is probably the first one that comes to mind when considering competitive pricing strategies. Find the market price benchmark for your product and set your price lower than it. It can work well for new businesses entering a saturated market because it makes your product affordable to a wide chunk of consumers and has the potential to draw them away from established brands.

Penetration Pricing

This is a strategy business use to enter a market and establish themselves when they don’t want to charge low prices in the long term. They start with low prices that draw attention away from competitors and attract that first set of customers using their products. This is only for the short term. Over time the price is increased to create a better profit margin.

Price Skimming

The perceived value of a product can change over time which is why a business might change the price depending on how long it has been on the market. This pricing model is popular with technology companies. Their brand new release initially has a high price because it is the latest innovation. Later down the line as the hype of the launch dies down and other new products on the market take precedence, the price decreases.

Bundle Pricing

To add value and make your price seem like a great deal, bundle complementary products together. Having a special price for buying the two together helps customers to justify spending money with you because they feel like they are getting more bang for their buck. It’s a great strategy for sale periods!

Dynamic Pricing

Ever wondered why the cost of a stay at a hotel can vary so widely? It’s because they’re using dynamic pricing. This allows the business to be flexible according to competitor pricing, consumer demand, and other factors. If business is slow, they can reduce their price to attract more customers. If they get a surge in sales, they can increase their price to reflect the high demand.

Value-Based Pricing

According to this pricing model, the price of a product is determined by its perceived value by the customer. Essentially what the customer is willing to pay for the product and the impact it has on them. This is useful for service-based businesses that focus on achieving transformational results for their clients. Customer-led pricing does require data analysis and social listening to gather customer sentiment.

Cost-Plus Pricing

For this strategy, the price of a product is calculated according to how much it costs. Production costs are totaled and a percentage is added on top to create the profit margin. It’s particularly popular among retailers and ecommerce businesses as financial viability heavily relies on the cost of making products.

Benefits of Competitive Pricing Strategy

It’s undeniable that price is a key part of purchasing decisions. So if you want to attract new customers and retain loyal ones, you need to carefully consider the pricing method you use. Especially if you run an ecommerce business that has to compete with big brands like Amazon.

You want your customers to perceive your price as a good deal. That means they are getting a valuable product for a reasonable price. Formulating a pricing strategy from research and analysis, you can set the best price and come up with a marketing strategy that positions your products as of high value to your customer base. Get it right and you can skyrocket your sales, boost your market share and grow your profitability.

Sales, market share, and profitability don’t only come from a strong stream of new customers. Don’t forget about your existing customers too. There’s a risk you could lose them to competitors due to pricing. Having an appealing pricing strategy ensures they feel like they are getting good value for money. A high retention rate will support your position in the market.

This works whether you charge a premium price or are the cheapest on the market. A competitive pricing strategy is all about having price intelligence so you can make the best decision for your business and your customers.

Disadvantages of Competitive Pricing Strategy

Market prices are always changing as your competitors evaluate their pricing strategy, production costs fluctuate and new players enter the market. That means you could end up becoming overly focused on your pricing when there’s more to winning new customers than finding the best price like your marketing strategy.

You’re at risk of entering a price war, constantly implementing price changes to beat competitors. This could end with you having such a low price that your product is completely devalued. For some, cheap products are not good products. They’ll do the job but can’t be relied upon to get great results. That’s not good for your reputation.

Be conscious that excessive focus on price can undermine brand perception and profitability and that in an ever-changing competitive market, your product price will never be perfect for every consumer.

How to implement a competitive pricing strategy?

With the value of using a pricing model that suits your business, industry, and customer clear, here’s how you get started with finding and using an effective competitive pricing strategy.

1. Research the Market and Competitors

Without pricing data, you’ll struggle to make pricing decisions. So don’t skip the first step of researching the market you operate within, the competitors who sell similar products, and the customer base that is going to be the one ultimately making the purchasing decision.

The better you under the industry benchmark, what others are doing and consumer demands, the easier your decision-making will be. Your pricing only makes sense within the context of price comparison as this determines your positioning.

2. Set Clear Pricing Objectives

What do you want to achieve with your pricing strategy? Look beyond the obvious ones of sales, market share, and profitability. Get more specific to your brand and business goals. You may want to establish yourself as an accessible brand for everyday users with a low-risk low price point, servicing a large number of consumers.

Or you could establish yourself as selling unique products within a specific niche, setting a premium price for a product that consumers can’t get anywhere else. With your ultimate objective set, determine the key performance indicators to measure success as you make price changes.

3. Analyze Costs and Determine Margins

Your objective and how you want to position the business in the market have to make sense financially. So after outlining this vision and before putting anything in place, check the profitability of your objectives.

Calculate your profit margins and whether the price you have chosen is enough to absorb production costs and other costs of running the business. If it doesn’t, you need to go back to the drawing board to find a pricing model that aligns with both your vision for the business and the financials of the business.

4. Implement and Monitor

Once you’ve decided on an effective pricing strategy, put it into action. Implement the new pricing method and closely watch what happens. Measure and regularly check your specific KPIs as well as standard business metrics like sales, new customers, and retention rate.

You may find you need to make adjustments to get it just right for your customers, market positioning, branding, and business operation. By monitoring the impact of your price changes, you can make those improvements sooner rather than later.

FAQs

How often should I review and adjust my pricing strategy?

You want to find a healthy balance between staying on top of your pricing strategy by considering market changes without becoming hyper-focused on your pricing. A good guide to follow is to review every 6 to 9 months. If you bring a new product onto the market, it’s a good idea to consider what this means for your overall pricing model and whether adjustments need to be made.

Is it always necessary to have the lowest price to be competitive?

Not at all. Different consumers have different wants and needs according to the industry and product. Some brands make a lot of money with premium pricing that positions their products as high-value. Even though their products cost a higher price, their customers will choose them over cheaper competitors because that’s where their customers want to invest their money.

What is an example of competitive pricing?

We’ve discussed a few competitive pricing strategy examples in this article. One popular one for newcomers to a saturated market is competition-based pricing. This is when you set your price solely according to the industry benchmark. You choose a lower price than this benchmark and focus on your affordability compared to others on the market.