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Competitive Pricing: Avoid Price Wars, Save Profit Margins

competitive price meaning

To tackle the challenges that come with building a successful strategy for organizational growth, it’s essential to start by knowing how to build a business growth strategy effectively. SWOT analysis is a well known strategy tool – probably the first strategy tool most people come into contact with without realizing its to do with strategic analysis. Here are a few examples of businesses that may adopt a Competitive Based Pricing strategy.

  • This is a classic example of a company that offers a “best price guarantee”.
  • In environments with minimal product variation and many options available, brands may rely on a competitor-based pricing strategy to determine their optimal pricing positions.
  • And with that kind of purchasing power, the company can negotiate lower prices from the manufacturer on bulk bike purchases.
  • The market can become static as a result, and if the market price equilibrium is suboptimal, the profit of the entire market will be reduced.
  • And manufacturer warranty programs may not cover damage from non-licensed products.
  • Competitor-based pricing is an excellent tool for understanding the current market and general customer expectations of pricing, but it doesn’t look at the whole picture.

To be effective, your price comparison must be focused on like-for-like products or services. Carrying out a market-wide price comparison of your competitors can be intensive and laborious, and you have to take into account that prices can change quickly. As we’ve mentioned, competitive pricing analysis should form part of every pricing policy, regardless of whether it’s the main metric you plan to use. Industries like retail, for example, regularly use competitive pricing, especially online as prices can fluctuate regularly. Opt for a lower price and you could seriously damage your turnover and profits.

types of competitive pricing strategies

A competitive pricing strategy is a price-setting that is based on your competitors’ prices. When you know how the prices of your top competitors in your market and how those prices might meet customer expectations, you have a basis for determining the rates of the prices of your own products or services. Competitive pricing is a marketing strategy whereby businesses set prices based on their competitors’ prices. Also known as competitor-based pricing, this strategy can be used in online and offline markets and is often used to attract more customers and increase market share. However, for competitive pricing to be effective, businesses need to understand their competitors’ pricing strategies and how consumers perceive value.

Another helpful models is Four Corner Analysis, to establish a competitor strategy and so understand if their pricing may change. Competitive Based Pricing (or Competition 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 (Cost Plus Pricing).

From there, you can evaluate how your product is positioned across those sets of options. This aligns the positioning, value propositions, and price to build customer perception. Famous in the supermarket space, the Price Match Promise is where a company will commit to matching the price of the competition on particular items. It works well if you can’t predict or research competitor price points, but are sure that you can match them. Given the risk involved, as your cost base may be different to those you match, this particular method is more suited to companies that provide more than one product or service.

Competitive Pricing: Definition, Examples, and Loss Leaders

While competing on price may be a good strategy for some companies, there are some disadvantages. If a company’s product has features that competitors’ products don’t have, it may not make sense to compete on price alone. It also encourages companies to focus on short-term gains rather than long-term sustainability. If you’re selling a $50 item compared to a $45 competitor’s product but you still find people purchasing yours, there’s no need to cut the $5 difference and shrink your profit margins.

By laying the foundation with competition-based pricing, you can come to understand the nuances of your market and explore more complex pricing methods. With the assistance of software solutions, you can analyze and update price data continuously. This is the first step toward harnessing the power of dynamic pricing models driven by supply and demand. And with that kind of purchasing power, the company can negotiate lower prices from the manufacturer on bulk bike purchases. Large corporations can rely on greater volume, more than higher  profit margins, to achieve desired revenue outcomes. So Target’s lower acquisition price allows it to charge less, undercut smaller retailers for the same product, and realize a profit.

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Absence of competitor pricing creates blind spots to how your consumers really perceive you in the market. This could be beneficial if you have a large market share or can beat the competition on value as your potential customers could see your value proposition as a bonus. Depending on your market share and the perception of your brand, you could price yourself as a premium product and go above the market price of your competitor. This stage involves taking on the role of your customer and searching your direct competitors to understand how they price products that are in direct competition with you. Analyzing competitors’ prices can be prone to errors if you use the wrong price checking tools or try to carry out the process manually. There’s a lot of research and interpretation of companies, cost, and industry breakdown to understand how your competitors are pricing their products.


These tools will often allow the user to input their pricing information and see how it compares to the prices charged by their competition. Save your best deals for customers who purchase repeatedly to build customer loyalty, increase customer lifetime value (CLV), and generate predictable revenue. Finally, list the retail price point each competitor is selling their comparable product for. Triangulate the complete list and you’ll see the boundaries of your prices relative to the market. The penetration pricing model is successful if you build a relationship with buyers after their first purchase. Continue to cross-sell and upsell with more profitable product offerings once you’ve won them over on price.

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First, it allows companies to better understand their relative position in the market. Build a comparison table that pits competitors’ comparable products against your own, but don’t be afraid to price higher than them. So long as you can prove yours is worth the extra money, your profit margins don’t have to shrink to remain competitive. Go back to your competitive price analysis and compare the target market for each competitor. Find the brand selling products with the biggest overlap with your own target market for accurate comparisons. Looking at competitors’ prices helps you understand the options in the market.

What is Competitive Pricing Strategy?

But a bigger risk is severely underpricing your product and potentially losing profits. 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. Vendors who are not market leaders can use the accepted price as a starting point.

competitive price meaning

Competitive pricing is charging a price that is comparable to other vendors selling the same item. 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. Flintfox’s Intelligent Pricing Engine takes complex data sets, including niche competitor information, and delivers accurate pricing at hyper-speed. Easily connect Flintfox to your ERP, use existing POS systems, and access what you need on any device in real-time.

How to conduct a competitive price analysis

A few tweaks to your product pages, advertising creatives, and marketing strategy reinforce that idea to future customers and prevent them from asking why yours is worth the extra $25. Promotional prices are most successfully used intermittently to bring attention to your brand and draw in new customers. However, the risk of promotional pricing is, when your sales and discounts become predictable, consumers will wait until products go on sale and not pay full price. This can devalue your brand and bring the wrong type of customer to your business. However, you can strategically price some products as a loss leader to entice customers in and make up the profit on the rest of your portfolio of products or services. The problem here is that competitive pricing data can still be a highly manual process, which is inefficient when price changes can happen daily, and many businesses offer online-only offers.

competitive price meaning

You have the freedom to set prices above, below, or equal to those of competing businesses. But first, you’ll want to understand the pros and cons of each competitive pricing strategy. Your business circumstances and strategic outlook will play a huge role in pricing your products at the industry level. To summarize, certain businesses need to use competitor-based pricing extensively because their customers price compare and the cost of switching from buying a product at store X or store Y are exceptionally low.

In order to arrive at a reasonable pricing decision that maximizes profit margins, group your competitors together according to relevance in ascending order and see where your product and brand fits in the range between them. We understand that competitive pricing seems confusing, yet it meets the needs of online retailers. A simple way to conduct a competitive price analysis is to use a digital price comparison tool.

It requires thorough research on what your competitors are doing, what they offer and at what price they offer in order to arrive at your own pricing strategy. When you’re just starting to acquire your first few customers, there might not be enough data to understand the pricing fit from your customer base. competitive price meaning Therefore, you can use data from competitors who have been in the market for awhile to aid your pricing strategy as you test the waters for yourself. Another method of analyzing competitors’ prices is to look at the prices charged by companies for similar products or services in different markets.

If you want your price to be a differentiator and a means of attracting potential customers, you could position yourself as a cheaper option when it comes to cost. Do they alter prices in line with seasonal changes and how do they deal with offers and promotions that could impact your own pricing if you’re trying to stay competitive. You need to know this before setting your own price otherwise you won’t be setting prices based on a level playing field. If there are other factors to take into consideration — like features or overall value proposition — your price matching won’t offer any benefit unless it also takes into account these additional tangible benefits and features. As we said at the start, this is just one of the possible pricing strategies and it’s worth finding out about all the options so you can be confident you are making an informed decision.

Once the potential customer enters the store environment, shifting to the role of customer once the decision to purchase the loss leader is made, the hope is to attract them to other store products that generate a profit. Not only can this attract new customers to a store, but it can also help a business move inventory that has become stagnant. Competitive pricing analysis is a tool that businesses use to assess the prices of their products or services against competitor prices.

  • Competitor based pricing is commonly used to test product pricing, especially if you’re new to the market.
  • They price their product at $30 per bottle to lure price-sensitive customers away from their competitors.
  • From there, you can evaluate how your product is positioned across those sets of options.
  • In some instances, a non-licensed product may fail to function properly.
  • Competitive pricing requires you to examine the market before you decide how to price your products or services.
  • At times, loss leader prices cannot be officially published as a minimum advertised price has been set by the manufacturer.

Department stores like Costco, for example, can offer items at the cheapest price only because they have millions of customers driving (albeit small) profits. In many industries, particularly retail, the selling price of products can change daily, in line with promotions and offers. As a result, if you’re comparing prices infrequently, you can easily find yourself with incorrect matches. For example, luxury brands maintain higher pricing to attract wealthier customers.