Competitive Pricing: Definition, Advantages & Disadvantages

Competition-based pricing is a great first step in finding the best possible selling price for your product or service. Market research gives you a solid base on which to make your pricing decisions. One that’s easy to calculate, quick to implement, and relatively low risk. Competitive Based Pricing is a pricing model where your price points are heavily influenced by those of your competitors. This approach focuses outwardly on the market, rather than inwardly on your costs . It is often used when you have a similar product or service to competitors.

Hearst Newspapers participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. Tap into our retail dataset of over 1 billion SKUs across 190,000 brands powered by proprietary AI-driven algorithms. Now you know what a Competitive Pricing Strategy is, and its Pros and Cons, the big take away you’ve learnt is that it works best when used in combination with a range of other pricing strategies. The overall goal of your business eventually should be to Competitive Pricing Definition maximize revenue and profits, even if it does take a little bit of extra work and proactivity for your pricing team. All potentially been aligned in your respective industries for some time, so the chances are slim that your pricing strategies as a group could all flop simultaneously. Whichever price you choose in the example above (from $61 to $79 or any dollar figure in between), a Competitive Pricing Strategy is one way to stay on top of your competitors and maintain dynamic pricing. Consumers are searching for tools to compare prices before purchasing.

Resources

Alternatively, if your competitors change their prices, you can use this as an opportunity to get a strategic price advantage over them in the short term. In this example, companies A, B, and C have used competitor-based pricing as a part of their business strategy and gained and lost revenue alongside one another. Company D went with a more well-rounded approach and, while starting lower, grew more effectively over time. Market alignment is a big consideration for SaaS and subscription companies. If you’re not matching up with customers’ expectations on price, whether you’re coming in under or over the current trends, it’s impossible for your company to survive in a competitive market. So Target’s lower acquisition price allows it to charge less, undercut smaller retailers for the same product, and realize a profit.

Being the lowest cost option in a market is one of the strategic positions you can take (see Bowman’s Strategy Clock for others) using Competitive Based Pricing. When you’re in this position you’re providing the product or service at a price that is perhaps even below cost. Other options include cost-plus pricing, where a set profit margin is added to the total cost of a product – including materials, labor and overhead. Demand pricing strategy is where prices are determined in correlation with demand to maximum sales for during high demand periods. During high demand periods like holiday season and weekends, prices go up with a rise in demand, and vice versa. When defining a pricing strategy, one must define the competitors carefully, analyze congruency between competing products, and keep in mind that price, in itself, is a signal about a product’s quality. Competition-based pricing can be an excellent choice for brands that want to enter a market quickly and easily.

Why PROS Was Named a CPQ Leader in the 2022 Gartner® Magic Quadrant™ for the Second Consecutive Year

The tool provides you with global insights on your competitor, as well as tracking your competitor’s products or services range and prices over time, for on-going analysis. With this tool you can monitor, control and make changes to the prices accordingly. We can run a range of pricing analyses like conjoint analysis to measure the value customers place on particular features of a product or service, including the price. These pricing analyses will also help you identify the optimal bundle of product benefits to help you beat out the competition.

• Competitive pricing strategy is where the final prices on their products or services have been analysed, modified and evaluated against the prices of their competitors.
• Competition-based pricing is a great first step in finding the best possible selling price for your product or service.
• A lack of price intelligence and qualitative research means some businesses may over or under-price their products.
• When companies base their prices on their competitors’ prices, they risk leaving potential revenue and profit on the table.
• The most common ways businesses raise profits are by increasing sales, decreasing production costs, and lowering overhead.
• Competitive pricing simply dictates that you price your goods or services close or equal to what your peers charge.
• But first, you’ll want to understand the pros and cons of each competitive pricing strategy.

Think of pricing as a game of darts where you’re trying to hit a bullseye with the perfect price, but there’s all that extra space to “distract” your dart. Data eliminates that space, paring down the dartboard as much as possible to guide your dart. This means that they may have to offer product features that competitor products don’t have. They may have to employ a different marketing strategy, well-advertised sales being one method.

Building Up to Competition-based Pricing

Your pricing strategy should always take a long-term approach to your pricing, but too often pricing strategies are replaced with short-term tactical decisions that can damage your market share. Now, there are several benefits to using competitive pricing analysis, all of which help to guide your decision making and ensure you place and price your product in a way that appeals to customers. SaaS and subscription companies are more successful with a well-rounded strategy that includes competitor analysis, benchmarking, and in-depth research into your own company’s metrics. Whether you’re just entering the market or working to solidify your current standing, the price you choose will inform you of the customers’ perceived value of your brand. Just remember that competitor-based pricing, like most simple pricing methodologies, doesn’t optimize your company for growth. With competitive pricing, you can tailor strategies to financial objectives.

The tools and resources you need to take your business to the next level. The tools and resources you need to get your new business idea off the ground. Self-Employed The tools and resources you need to run your own business with confidence. Midsize Businesses The tools and resources you need to manage your mid-sized business. Your Guide to Growing a Business The tools and resources you need to take your business to the next level. Your Guide to Running a Business The tools and resources you need to run your business successfully.

You’ve partied a little too hard the night before, forgot about the paper you were supposed to write, and then think it’s a good idea to paraphrase the wikipedia article you found on Botswana economics. Obviously the market doesn’t dole out suspensions for copying prices, but the processes of swiping an essay and competitor based pricing are pretty similar. When a company is unable to anticipate competitor price changes or is not equipped to make corresponding changes in a timely fashion, a retailer may offer to match advertised competitor prices. This allows the retailer to maintain a competitive price point for those who become aware of the competitor’s offer without having to officially change the price within the retailer’s point of sale system. If you’re unfamiliar with competitive pricing strategies, this guide is here to help you get a foothold. Below, we will break down just what competitive pricing is, it’s benefits and disadvantages, as well as show you some real-world examples of competitive pricing to help you get started.

Pick out the companies that most closely match your own brand’s profile—these are your top competitors. Competitor-based pricing is one of the best tools for finding this match. Seeing how competitors build their pricing tiers, what features they differentiate on, and what they use as their core value metric makes it easy to structure your own pricing more effectively.

Businesses need to keep an eye on their competitor’s pricing strategy while setting prices to get the much needed competitive edge in the market. Comparing prices online is easy and customers are well aware of the monetary value of a product. Competitive pricing strategies perform best when they are automated and become part of a dynamic pricing strategy, that changes prices when certain factors such as competitors’ prices change. In addition to this, businesses should also take a closer look at the price elasticity of each of the products, this indicates the demand per product for a certain price. Competitive pricing is also a good first step in developing a key-value item strategy or in combination with business rules, as determined by the pricing managers.

Frequently, businesses that operate with a high volume of products find promotional pricing an attractive way to boost revenue and increase sales by using a smaller than usual profit margin. When adopting a Competitive Pricing Strategy, you generally price your products slightly below your competitors, the same https://online-accounting.net/ as your competitors, or slightly above your competition. For example, if you are selling 10-pound bags of coffee and your competitors’ prices range from $60 to $80, you’d choose a price between those two numbers, say $72. Competitor based pricing is a lot like a bad case of plagiarism in a college class.