Competitive pricing is the process of selling your products or services at the same or a lower price than your competitors. Businesses can also keep prices competitive by offering better payment terms, making it easier to buy goods or services.
Competitive pricing helps you to stay relevant in your market and attract customers. In this article, you’ll learn how to choose which strategy is best for you, plus the benefits and downfalls of competitive pricing.
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Competing pricing is the practice of examining the market before you decide how to price your products or services. To practice competition-based pricing, determine what other businesses ask for the same goods or services and set prices accordingly.
When thinking about different competitive pricing strategies to implement, there are a few key factors to consider:
You can set prices above, below, or equal to those of competing businesses. There are many different pricing strategies that you can use to gain customers and make sales, but there are pros and cons to setting your costs at each price point:
Your business circumstances and strategic outlook will play a huge role in pricing your products at the industry level.
To calculate the competitive price (or price index) of a product or service, divide the cost of your product by the average competitor's market price. Then, multiply that by 100. If the result is:
Just like no two businesses are alike, no two price competitiveness strategies are alike. Here are some competitive pricing strategy models that you can implement for your business:
Low-price competing pricing consists of a company setting prices lower than competitors to win customers over and break into new markets. A common example of low-price competitive strategies is in retail, where giant discount stores are known to be cost-effective. And while they usually carry the same items as competitors, they are often priced lower.
Just the opposite of a low-price strategy, a high-price strategy is when a company sets its prices on goods and services higher than the market average. This, in turn, positions the brand and products as “luxury” or “superior,” driving market demand. You can see this pricing strategy with specialty food items, where high-end chocolates or organic produce is priced higher than competitors, usually do to higher quality.
A somewhat middle ground between low and high-price strategies, the matched price strategy involves matching competitor pricing. This allows a company to avoid price wars and maintain its position in the market, allowing them to remain competitive.
Grocery stores often use this strategy, where their pricing fluctuates based on competitors' prices. Additionally, many stores have a “price match guarantee,” where you can purchase the item at their store at a lower price than a competitor.
Penetration pricing is where a business sets prices lower than competitors to gain market share, similar to a low-price strategy. After the business attracts customers, they will likely raise prices steadily to recoup any lost profits.
For example, streaming services initially set their prices at a low cost and have raised prices multiple times over the last few years, sometimes more than once a year.
When a company engages in promotional pricing, it temporarily reduces the price of a product (or products) to increase short-term sales. The company can use this strategy to attract new customers and clear out any excess inventory.
A well-known example of promotional pricing is seasonal sales, including Black Friday, Cyber Monday, and Prime Day.
A psychological pricing strategy is captive pricing, where you sell one product at a low price but sell the complementary (or often necessary) products to use that product at a much higher premium price.
An example of captive pricing is a printer. Even low-end printers require customers to regularly buy ink at a premium price.
Bundle pricing is a relatively common competitive pricing practice where you sell multiple complementary products or services together at a discounted rate. If these products were to be bought individually, the price would ultimately be higher. This strategy encourages customers to purchase additional items since they get a deal and often become repeat customers.
You can find examples of bundle pricing at fast-food restaurants, where you can buy a sandwich, fries, and a drink together at a lower price than if you buy all items separately.
Competitive pricing is all about knowing your market and industry peers as much as possible—from products to pricing and everything in between.
Follow these steps to conduct a competitive pricing analysis:
Note that monitoring sales activity and changing strategy as needed is critical.
Competitive pricing can be cost-effective and easy to implement, especially for small or midsize businesses that don’t have the resources to perform extensive market analyses. By pricing products the same as larger entities, you’re benefiting from the competitive intelligence gathered and market research conducted by industry leaders.
However, if you’re a smaller manufacturer, setting competitive rates can be perilous if you disregard production costs. You can match the prices of larger companies, but you may not have the resources to sustain those prices if your profit margins are too slim. An unyielding commitment to competition-based models could drain available capital and trigger adverse financial outcomes.
There are many competitive pricing strategies, and not everyone is best for every business. There are some tips, however, for selecting a winning strategy to overtake your competition and boost productivity:
Choose the pricing techniques that will help set your business apart from the competition. And while you’re hyper-focused on sales activity, don’t forget about different accounting software like QuickBooks that can help increase efficiency.
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