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How to Create a Competitive Pricing Strategy – with Definitions, Examples, and Benefits

Dan Cakora< Dan Cakora February 23, 2023

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.

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. 

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

The advantages of competitive pricing include:

  • Simplifying your approach to pricing
  • Increasing your sales volume and revenue
  • Adapting to changes in the market
  • Boosting traffic to your store or e-commerce platform

Additionally, implementing a competitive pricing strategy has a protective effect: Competitive prices prevent market share losses and prevent your loyal customers from taking their business elsewhere.

Disadvantages of Competitive Pricing Strategy

There are some drawbacks to a competitive pricing strategy, including:

  • Lower prices may prevent you from covering costs
  • Customers base purchasing decisions on more than just cost
  • Match your products to competitor prices, especially if they’re not exact matches
  • Your competitors may be pricing their products incorrectly

While you must carefully weigh these disadvantages, they don’t negate the benefit of offering your customers competitive prices. Most business owners will see the benefit of adopting a competitive pricing strategy for at least a portion of their products.

Types of Competitive Pricing Strategies

There are three basic approaches to competitive pricing: lowering your prices, raising your prices, or keeping your prices even with the competition.

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.

Competitive Pricing: Examples

How do these competitive 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.

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.