Understanding What Competitive Pricing Entails

Understanding the different pricing options, pros and cons.

- 10 Minutes read

Welcome to this Guide

Effective pricing is essential for businesses and that is provided by the competitive pricing strategy. This guide offers a deeper understanding of the different options you can select for your business, as well as the pros and cons of this strategy as a whole.

Defining Competitive Pricing


The competitive pricing strategy aims to set the price of a product or service depending on the competition’s price. This strategy is more often put into place by businesses who offer products, rather than service, as products are easily similar in contrast to services.

The first step for implementing this specific pricing strategy relies on executing a competitive price analysis which implies evaluating competitor price changes, as well as the way their pricing tactics. In order to understand how you should position yourself, we have included below detailed explanations of the different competitive pricing options.

Pricing Strategy Options


Four options exist for this particular pricing strategy. We shall provide you with an explanation:

  1. Using the same price as your competitors.

    By adopting the same price as your competitors, you are leading the consumer towards a direct product comparison. The consumer will most likely purchase the product with the most features, and that must be your product. This will result beneficial for your business as your customer base will increase. On the other hand, it is primordial to state that it could be considered illegal by the Federal Trade Commission: if the product is underpriced in comparison to its value it would be seen as “predatory”.

  2. Using a price that is slightly below your competitors’.

    If you decide to set a price that is below your competitors’ price, you will automatically create a positive attraction from the customer towards the product. Even though this can have a positive impact on your customer base, you must consider the financial loss risk your business is facing. That is the reason why each step of a low-pricing strategy must be well planned, from a market and competitive perspective, but also from a product development and cost of manufacturing perspective.

  3. Using a price that is slightly above your competitors’.

    Pricing above that of your competitors is also known as “premium pricing”. Naturally, your customers will have higher expectations for your product or service and therefore you must be certain that your level of service or product features are better, otherwise you may lose a high number of customers.

  4. Using price matching as the last resort.

    This option comes in when all of the above cannot be applied. Price matching is destined to business who don’t know, or cannot anticipate its competitors’ moves. The aim of this strategy is to appear competitive in the eyes of the ones whom are aware of the competitor’s offer without having to adjust your price.

Advantages


  • Competitive pricing strategy helps you to prevent losing market share and customers to the competitors as it lets the business control the competition.

  • It is considered to be one of the most important criterias for online shoppers while making their final purchase decision.

  • Competitive pricing strategy can be combined with other pricing strategies as dynamic pricing, a more sophisticated approach.

  • It is not mandatory to cut your prices since competitive pricing gives you the opportunity to increase your prices while monitoring your rivals.

Disadvantages


  • There is always a risk of losing from your margins.

  • By setting a competitive pricing intelligence, retailers assume that competitors have chosen their prices correctly. But the pricing strategy of the competitors may not fit the company.

  • Small businesses have difficulties handling the necessary technology and resources for practising such a pricing strategy.

Conclusion


When selecting your pricing strategy you must always take into account legal and ethical issues. Pay attention to predatory pricing and price gouging, as well as cognizant of minimum advertised pricing. Price is an important aspect of a business’ marketing mix. When you’re identifying a marketing mix, the prices of competitors will factor into how your business chooses to price its products, whether you’re utilizing competitive pricing or another method.