As the name suggests, competition-based pricing is a pricing strategy in which a company sets the price for its products after observing the competition. However, this strategy does not cover initial costs and only takes into account the selling price of the rivals’ products.
To set the price of a product according to the price of the competition you must find the rival product that is exactly the same. It is useless to set an X price for a pair of trousers if your scale for pricing has been a shirt. So, if you want to use this strategy you must be sure to know which are the competing products. To do this efficiently you have price monitoring tools available that allow you to create automatic connections from the EAN code of the products
Competitive pricing is one of the basic pricing methods, along with cost-based pricing and market-based pricing. In this post we will look at the methods of competitor-based pricing.
Parity pricing with competitors
Setting prices at the same level as the competition occurs when the difference between your product and the competition’s is zero or almost undifferentiated. This strategy can also be used in markets or verticals where products are priced in the usual way – for example, bread or eggs.
Underpricing the competition
Penetration strategy consists in entering the market with prices significantly lower than the competition in order to gain more customers and thus increase market share. This strategy is valid in the long run, because when your e-commerce is established in the market, you will be able to raise prices to increase your profit margin.
Another strategy for pricing below the competition is discounted pricing. Simply by setting prices lower than the rest of your competitors. This is a viable method for businesses with a large number of products or physical stores of large surfaces. In order to implement this strategy without fear – be careful not to spoil the profit margin of your products – you can use dynamic pricing tools. This software automatically updates the price of your products according to pre-established rules.
Pricing above the competition
Setting prices above those of competitors is a double-edged sword: while in the long run you can establish your brand as a prestigious one, gain importance in the marketplace and quickly recover your investment, users may respond negatively to a price increase and that aspect will undoubtedly affect your sales.
Price skimming is a pricing strategy that consists of establishing a high initial price for a product and, over time, lowering that price to reach more areas of the market. This strategy is primarily used in the technology or video game sectors.
If your business occupies a leading position in a sector where the purchasing power of users is very high, opting for a prestige strategy is the best option for your business. Through very high pricing, the perception that consumers will have of your product is that it is one with a very high quality. This strategy has to be accompanied by an advertising campaign that appeals to these characteristics: reputation, quality, differentiation, etc.
Focus on the competition when discerning which price to set is a viable choice. However, to do this it will be essential to monitor your market massively to know average prices, the relationship of your products with the competition or know the stock of your rivals. It’s difficult to handle that amount of data manually, so netRivals has designed software that allows you to track your competitors so you can set pricing strategies with a deep knowledge of the market.