Strong competitive pricing strategies entice new customers and give your business an edge in the market. Dan Cakora, Business Consultant at Vendavo illustrates how to build your strategy and highlights the benefits of various pricing methods.
Originally published: February 23, 2023
Updated: August 26, 2025
Consumers base their purchasing decisions on various factors, but the final decision often comes down to price. According to a Global Retail Study, 87% of shoppers want to know that they “got a good deal” when purchasing an item.
So how do you balance this customer need with the business goal of maximizing your profits? After all, the pressure to competitively lower your prices is constant and intense.
But you might be surprised to learn that the answer isn’t always to lower your prices.
Here’s how to create a competitive pricing strategy to boost your sales and help you stand out.
What is a Competitive Pricing Strategy?
A competitive pricing strategy is when you price your items based on your position in the market or industry niche rather than on typical product cost.
When you use competitive pricing, you evaluate the prices of your competitors’ products and adjust your prices on an ongoing basis. This pricing model leverages competition to build customer interest and encourages innovation — especially in industries like tech.
Naturally, competitive price points can impact your own pricing strategy in more ways than one. More often than not, when a product has been on the market for a while, similar offerings will begin to emerge. When this happens, and the price for your product or service has reached a point of equilibrium, competitive pricing is the next go-to strategy. As the name suggests, a competitive pricing strategy involves setting prices relative to competitors in order to take the best advantage of the competitive market.
Of course, the by-product of this is a certain amount of price competition pressure and, sometimes, an all-out price war. The key to effectively navigating the pricing landscape, without devaluing your product or service, is knowing when and how to respond.
How is Competitor-Based Pricing Calculated?
A competitive pricing calculation relies on pricing data from other companies in your industry, so start by calculating the average price of similar products across your primary competitors.
Then, you can adjust your prices based on this average price. This strategy works especially well if you sell an identical product as your competitors, but you can still calculate the average price of similar items across other companies.
Collecting and Visualizing Competitive Pricing Data
Before you decide to implement a competitive pricing strategy, consider visualizing the data you’ll be working with to ensure a holistic view of the competitive environment.
Here is a series of blogs I’ve written on the topic to give you clear methodology for the process of visualizing competitive pricing data.
- How to Calculate a Competitive Sales-Weighted Price Difference
- How to Visualize Competitive Prices with a Comprehensive Market View
- How to Collect, Analyze, and Visualize Competitive Price Data
The Importance of Competitive Pricing Strategy
Consumers are avid researchers. One retail study discovered that 53% of shoppers “always do research” before deciding to buy. And according to a Global Retail Study, 57% of shoppers research on their phones while standing in a physical store.
This data means that your customers are aware of your competition — maybe even more than you are! But a competitive pricing strategy considers your competition’s positioning, which leads to higher sales and profits by ensuring that you put relevant prices in the market.
Competitive Pricing Benefits and Disadvantages
Before you adopt a competitive pricing strategy, it’s essential to understand its strengths and weaknesses.
The Benefits of a Competitive Pricing Strategy
An intelligent competitive pricing strategy can deliver targeted outcomes that can empower sales teams. The real power lies in how these benefits compound to create sustainable competitive advantages.
Enhanced Market Share Capture
Market share gains happen when you set prices strategically relative to competitors. You don’t need to be the cheapest option to win market share. You need to offer the best value proposition at your price point.
Research shows that 90% of businesses that actively monitor competitor prices report a significant boost in their market positioning. Smart competitive pricing helps you identify market gaps where competitors have priced themselves out of reach. These gaps become opportunities for expansion.
Geographic expansion becomes easier when your pricing strategy accounts for regional competitive landscapes. What works in one market might need adjustment in another based on local competition.
Increased Sales Volume and Revenue Growth
Competitive pricing directly impacts your bottom line through higher conversion rates. When your prices align with market expectations, customers move through the purchase decision faster.
You remove price as a barrier to entry. Prospects who might have hesitated due to cost concerns become active buyers. This acceleration in the sales cycle means your revenue grows not just from individual transaction value but from sheer volume.
The ripple effect extends to repeat purchases, too. Customers who feel they received fair value the first time return for additional products or services.
Strategic Profit Margin Optimization
Competitive pricing and profit maximization work together when you understand the full competitive landscape. In a chat with Distribution Pricing, I share a few notable scenarios, like “If the price of your company’s products goes up and its competitor follows, it is a sign that your company is a pricing leader in its market.” This is a good indication that the company can positively affect profitability by leading with other price increases.
Price segmentation opportunities emerge from competitive analysis. For instance, you might discover that certain customer segments will pay more for specific features while others prioritize basic functionality at lower prices.
The key lies in strategic timing. During peak demand periods, you can price more aggressively. When competition intensifies, you can adjust margins to maintain volume while protecting core profitability.
Market Responsiveness and Agility
Competitive pricing strategies create organizational muscle memory for rapid market response. Your team develops systems and processes for monitoring price changes and adjusting accordingly.
Economic shifts become manageable rather than catastrophic. When inflation impacts your industry or supply chain disruptions affect costs, you can adjust prices in context of what competitors are doing. And when new competitors enter the market, they’ll no longer catch you off guard when you have established frameworks for evaluation and response.
Customer Acquisition and Retention Benefits
Price transparency builds trust with potential customers. When your pricing reflects market standards, prospects spend less time questioning your value and more time evaluating your solution.
Customer acquisition costs decrease because price objections become less frequent. Your sales team can focus on demonstrating value rather than defending pricing decisions. Retention improves because customers feel confident they made smart purchasing decisions. They are less likely to constantly shop around when they believe your prices remain competitive.
Disadvantages of Competitive Pricing Strategy
Competitive pricing works best when you know the trade-offs. Below are five core drawbacks and why they deserve a closer look.
Margin Squeeze and Price Wars
Price matching can push margins below production costs, especially when rivals rely on loss-leader tactics. Slim margins reduce cash for R&D and marketing. Repeated cuts can trigger a race to the bottom that only ends when nobody earns a profit.
Be warned that prolonged price wars drain working capital and amplify financial risk. Even a brief drop in price demands a large jump in volume to break even, which may not materialize in a saturated market.
Brand Blur and Product Devaluation
Settling near the market average makes your offer look interchangeable with cheaper alternatives. Indeed notes that products priced exactly like competitors lose the chance to signal superior quality or unique features.
Constant discounting erodes perceived value and pushes the brand toward commodity status. Once buyers view your solution as generic, lifting the price later becomes an uphill battle.
Copying Competitor Errors
Public price lists rarely show hidden discounts, bundles, or financing terms. A rival’s visible price can be incomplete or inaccurate, yet it often becomes the baseline you follow.
One misprinted price cascaded through the market and damaged trust across the category. Matching that error can lock your firm into loss-making deals until the next review cycle.
Blind Spot on Customer Value
Competitive benchmarks speak about competitors, not buyers. If the copied price sits below what customers are ready to pay, the firm leaves revenue on the table.
Ignoring the value proposition risks underpricing premium features and confusing the market signal of quality. When price and value drift apart, sales teams struggle to justify the offer, and churn may rise.
Reactive Trap and Resource Drain
An unyielding focus on competitor moves can drain capital and restrict other strategic investments. Teams may spend weeks chasing rival price changes instead of developing new value propositions.
This reactive cycle breeds short-term thinking. Such focus limits strategic planning and stifles innovation. Over time, the organization becomes a follower rather than a market leader.
Types of Competitive Pricing Strategies
There are three fundamental approaches to competitive pricing: lowering your prices, raising your prices, or keeping your prices even with the competition. In addition to these basics, some companies explore mixed or dynamic pricing as well as advanced and more emerging strategies.
| Approach | Purpose | Pros | Cons |
| Lower Pricing | Gain rapid traction, clear excess inventory, or deter new entrants. | Attracts price‐sensitive buyers. Builds market share quickly. | Shrinks margins. Can set a low-value perception that is hard to reset. |
| Equal Pricing | Neutralize price as a deciding factor while highlighting service or brand perks. | Cuts the risk of a price war. Keeps comparison shopping simple. | Limits upside on high-value items. Requires constant monitoring. |
| Higher Pricing | Signal premium quality or unique features that justify a larger investment. | Boosts profit per unit. Reinforces upscale positioning. | Narrows the buyer pool. Invites cheaper substitutes if value is unclear. |
| Mixed / Dynamic Pricing | Adjust prices in real time based on demand, inventory, and seasonality. | Maximizes revenue peaks. Adds flexibility across channels. | Needs advanced tech. Risk of customer backlash if seen as gouging. |
| Advanced & Emerging Tactics | Use AI, machine learning, or segmented hybrid models to predict optimal prices. | Predicts demand shifts early. Automates complex, multi-market updates. | Relies on accurate data. Higher setup and governance costs. |
Lower Prices
Lowering your prices can be a valid competitive pricing strategy if you’re not as established as your competitors or are entering a market for the first time.
This may mean you accept lower margins for a short period while you build credibility and demonstrate value. In the longer term, the goal is to compete on something other than price competition so you can justify charging more for your goods and/or services.
Higher Prices
Believe it or not, raising prices can also be a way of outpacing your competitors. This type of competitive pricing strategy is most helpful when you offer a novel or proprietary product or service that is critically acclaimed to be better than your competitors’ offerings.
A higher price point can highlight the superior quality of your product line or give your business the reputation for being an “upscale” alternative to your competitors.
Equal Prices
Matching your competitors’ prices prevents you from losing business to customers looking for a better value. This competitive pricing strategy also allows you to emphasize a unique shopping experience, superior customer service, or other options that make your business the best choice.
Additionally, a “price-match guarantee” policy may draw in customers who want to be confident that they’re paying the lowest price on the market.
Mixed / Dynamic Pricing
Dynamic pricing uses live demand, inventory, and competitive cues to update prices throughout the day. Amazon changes some product prices every ten minutes. Airlines, ride-hailing apps, and ticketing platforms rely on the same logic to balance load and revenue generation growth when interest spikes or drops.
Advanced & Emerging Approaches
AI-driven engines push dynamic ideas further. Predictive models study weather, search trends, raw-material costs, and past wins to recommend the exact price that maximizes both conversion and margin for each SKU. Companies that once updated lists quarterly can now refresh figures daily because the system runs the math in the background.
Challenges, Risks, and How to Mitigate Them
Every pricing strategy faces challenges, especially in competitive markets where data moves fast and customer preferences shift. Knowing the risks in advance gives you a better shot at success and lets you design safeguards tailored to your business.
Pricing Below True Costs
Chasing a rival’s number without checking your own cost stack can push unit prices under break-even. Companies that copy competitor lists often struggle to cover overhead or raw material spikes.
Mitigation strategy: Build a live cost model inside your pricing engine. Tie every planned price move to current cost inputs and margin targets so discounts never slip past the floor.
Value Misalignment
Setting price only by external benchmarks hides what buyers actually prize. Ignoring your product’s unique value may lead to chronic underpricing or lost deals when the sticker feels high for the benefits offered.
Mitigation strategy: Map willingness-to-pay by segment and adjust positioning messages. Price premium tiers on outcomes that customers rate highest, not on a competitor’s average.
Competitor Mispricing Echo
A rival can post a temporary or mistaken price. If you mirror it, you inherit the error and lock in margin damage until the next review cycle.
Mitigation strategy: Run a daily audit of competitor moves and flag outliers against historic ranges. Require manual approval before any automatic match to prevent false follow-the-leader moves.
Reactive Price Wars
Constant undercutting sparks a cycle where each cut demands huge volume gains to stay profitable. Prolonged price battles drain cash needed for growth investments.
Mitigation strategy: Set guardrails that cap the depth and duration of any defensive cut. Pair the constraint with clear value-add messaging so the conversation shifts away from who is cheaper.
Incomplete Market Intelligence
Public list prices exclude hidden rebates, bundles, or service perks. Indeed stresses that a narrow view can deliver inaccurate benchmarks and risky decisions.Mitigation strategy: Blend scraped list data with win-loss insights from sales and customer feedback. A fuller dataset reveals the real deal price and stops you from chasing ghosts.
Competitive Pricing: Examples
How do these different pricing strategies work in the business world? Here are some competitive pricing examples to illustrate their usage:
Lower Price Strategy
FantasticBeans is preparing to sell a new type of coffee maker and discovers that its major competitors are selling a similar item for $74.99. So FantasticBeans sells its coffee maker for $69.99, appealing to budget-hungry shoppers.
But once customers are in the store, FantasticBeans enrolls them into a loyalty program and captures their contact details for future sales, using the lower price as leverage for a lasting relationship with long-term benefits.
It’s important to remember, though, that you’re likely to be cutting your margin as part of this competitive pricing strategy, so you’ll want to understand how to conduct a margin impact analysis beforehand.
Higher Price Strategy
Razor Elite makes and distributes shaving kits but is uncertain how to price its latest offering. Research reveals an average price of $39.99 for a comparable kit, but Razor Elite deliberately sets its price at $49.99.
This price point allows the marketing team to accent their product’s eco-friendly packaging and quality ingredients, especially compared to the “bargain” retailers on the market.
Equal Price Strategy
Best Buds Accessories operates an e-commerce platform that sells Bluetooth earbuds and other cell phone accessories. The company discovers that other online retailers sell their earbuds for $99 and decides to match that price.
However, the sales team emphasizes add-on products to incentivize customers to return and purchase additional accessories.
Competitive Pricing Methodology
A clear methodology keeps market-based pricing disciplined and repeatable. The steps below lay out a practical path you can apply in any industry.
- Competitor identification and segmentation: Competitor identification is the first step in any competition-based pricing program. Focus on direct rivals that solve the same problem, then group them into primary, secondary, and tertiary tiers so the analysis stays precise.
- Data collection: Pricing data comes from website crawls, public catalogs, invoices, mystery shopping, and customer interviews. Automated scrapers supply rapid updates, but manual spot checks capture rebate programs, regional bundles, and other nuances that tools may miss.
- Data validation and normalization: Raw feeds often include outliers, expired promotions, or missing items. Set quality rules that flag gaps and filter records by stock status, currency, and offer type before they enter reports.
- Data analysis and price benchmarks: Calculate the average, median, and range of competitor prices to expose the market midpoint and its extremes. Map each figure to feature depth or service level so you know when to charge a premium or adjust down.
- Real-time visualization: Dashboards with live indexes, deltas, and trend lines turn static files into actionable insight. Feed these signals into dynamic pricing engines so adjustments trigger as soon as a metric crosses a predefined threshold.
- Review and iteration: Refresh competitive data on a regular schedule to capture seasonal swings and flash promotions. Compare each new price to historical sales response, then refine guardrails and discount logic based on what the market actually buys.
Hybrid Pricing Strategies: Combining Models for Optimal Results
Competitive pricing pegs your offer to the market. Cost-plus starts with internal costs and then adds a margin. Value-based ties price to the customer’s perceived benefit. A hybrid approach mixes these pillars to capture the strengths of each.
Different models can serve different lines. Commodity SKUs may stay on cost-plus to guarantee margin discipline. Flagship features can follow value-based rules, while fast-moving add-ons track competitor shifts in real time. This mix lets you match local buying habits without rewriting your entire price book.
Consider a SaaS platform that charges a flat subscription for core access, then layers usage fees on high-value APIs. The base fee secures predictable cash flow, while the variable piece monetizes heavy users and upsell moments. Vendors that test similar hybrids report higher revenue and broader appeal because buyers see fair pay-for-value choices.
Running a hybrid system demands clear segmentation, live cost data, and frequent competitor audits. Modern pricing management software makes the hand-offs smooth by flagging cost floors, suggesting value tiers, and streaming market deltas into one dashboard. The payoff is a resilient price architecture that flexes with markets yet keeps margins intact.
As I said to Distribution Pricing, “My advice to anyone who finds themselves using a different pricing strategy than their competitor is to dig a little deeper and potentially reconsider your own pricing strategy to ensure it is still in line with the market. Run back through your price optimization analysis and look to see if there are some unusual price matrix issues that just need to be dealt with.”
AI/ML Competitive Pricing Techniques & AI-Driven Insights
AI-powered predictive analytics spot demand shifts before they show up in your revenue reports. Machine learning models ingest sales history and competitor moves to forecast the price point that maximizes both conversion and margin for each SKU. Pricing teams can update price lists in hours rather than quarters when that insight arrives every day.
Continuous web scraping pulls fresh competitor prices every few minutes and AI flags outliers the moment they appear. Instant alerts land in the sales or eCommerce portal so staff can respond before customers notice the gap. The platform also records each adjustment for later analysis, which increases model accuracy over time.
AI also enables scenario planning that asks what-if questions before a price goes live. Price elasticity simulations test how a one-percent shift affects volume and profit across customer segments. Wholesale leaders use these insights to spot SKUs that can absorb a higher tag without hurting demand.
Linking predictive models, real-time monitoring, and elasticity simulations creates a single source of truth for pricing teams. As the algorithms learn from each cycle, recommendations improve and margin gains compound quarter after quarter.
How to Respond to Competitors’ Prices: The Competitive Price Reaction Matrix
A competitive price reaction matrix calculates the proper competitive response to price pressure. The principles of competitive advantage and pricing power define the dimensions. To win, the firm must merely earn more profits than its competitors. Second place goes to the survivors who will live to compete again in the next round. Losers are the firms that go under. Given these ground rules and objectives, we can identify the optimal moves dependent on the firm’s position.
The Positions
If the firm’s offer is more attractive to customers than its competitor’s, then the firm has competitive pricing power. That is, the firm may be able to maintain or increase a positive price differential between its offer and its competitors without losing market share due to the customers perceiving that the firm’s offer delivers more benefits than its competitor’s.
If the firm’s profitability for the impacted customers is higher than the profitability which the competitor could achieve with those customers, then the firm has a competitive advantage. That is, the firm can use that competitive advantage to either attack a competitor’s customer base or defend its own customer base with a price reduction more profitably than one’s competitors during a price pressure war.
The Moves
There are four stances a firm should take in response to a competitive price threat depending on its situation: Ignore, Defend, Mitigate, or Accommodate.
If the firm both earns stronger profits in serving the impacted customers (possesses a competitive pricing advantage) and customers perceive the offer as more attractive (possesses competitive pricing power), then the firm should ignore direct price competition and carry on its strategy as it sees fit.
If the firm earns stronger profits in serving the impacted customers (possesses a competitive advantage) but customers do not perceive its offering as more attractive (lacks pricing power), then defending its market position with a measured price reduction may be merited. The margin reduction may be less costly than the potential loss of market share.
If the firm does not earn stronger profits in serving the impacted customers (lacks a competitive advantage) but customers do perceive the offer as more attractive (possesses pricing power), then the firm should mitigate price competition through reiterating and re-communicating its benefits.
Finally, if the firm both does not earn stronger profits in serving the impacted customers (lacks a competitive advantage) and customers do not perceive its offering as more attractive (lacks pricing power), then the firm will have to accommodate share and margin losses in the short term in the hopes of improving its value offering for the next cycle of competitive engagement.
Not all of the positions are equally attractive. But in real life, firms don’t always have pricing power and / or a competitive advantage, and they can’t win every customer profitably every time. But, they should be able to live to fight another day.
Key Takeaways
So what is competitive pricing, and what should business leaders know about it?
- A competitive pricing strategy adapts your prices to the market
- Shoppers carefully research pricing before making a buying decision
- Competitive pricing can be lower, higher, or equal to your competitors
Many businesses pair their competitive pricing strategy with a broader marketing approach, drawing in new customers with introductory prices and then selling additional products or services.
Market Data at Your Fingertips
The best decisions rely on data. Vendavo’s Profit Analyzer tool can give you a better picture of your competitors’ prices, allowing you to align your prices with your business strategy.
Contact us to learn more about competitive pricing strategies and discover how the right tools can give your business a competitive edge.