Competitive Pricing Definition | 4 mins read

Competitive Pricing Definition- How Does it Work?

competitive pricing definition how does it work
Chloe Henderson

By Chloe Henderson

The competitive pricing strategy helps businesses increase their traffic flow and average sales through market and competitor product price insights.

Studies have found that for many consumers, the main issue when shopping is the price. In the retail industry, polls show that the main customer concern in terms of pricing strategies is when they are able to find lower prices elsewhere for the same product.

This customer reaction is why companies should consider their competition when pricing their merchandise. Competitive pricing is the method of setting item price tags according to market and competitors' costs. By placing a competitive price, businesses can attract more store traffic, increase sales, and boost profit margins.

This article will further explain the logic behind the competitive pricing strategy and how businesses can implement it successfully.

Defining Competitive Pricing

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Competitive pricing is a strategy that bases a product or service's price on competitor averages and market value. This pricing model is commonly used by retail businesses that sell similar goods and services and need to attract customers.

Businesses that implement competitor-based pricing have three options- set costs below, equal to, or above the competition.

Offering lower prices than competing vendors can attract new customers and increase average sales. However, the business's profit margins can suffer if transactions only consist of low-profit items.
Companies willing to take this risk should have marketing actions that persuade buyers to purchase add-on goods to produce more revenue. Income earned from these high-profit products can supplement the capital loss from the discounted item's low profit margin.

A company can afford high retail pricing if they offer consumers a high-end experience, such as extra product features or payment plans. Unique brands that represent their identity as expensive or high quality can also raise prices due to their loyal customer base.

Lastly, a business can emulate market prices or the prices of other vendors within their industry. To direct traffic, companies must rely on their marketing skills to stand out from competitors and attract consumers.

Pros and Cons of Competitive Pricing

Pricing products in a competitive market based on fellow vendors' costs can help businesses stay on the customers' radar. However, competition-based pricing can lead businesses astray when it comes to long-term stability. This pricing strategy offers several advantages and disadvantages, including-

Advantages

  • Simplicity - Competition oriented pricing doesn't require extensive research, only insight on what products other suppliers offer and their costs.
  • Low Risk - Determining who the top competitors are, as well as their price points, offers a comprehensive pricing model that ensures customer attraction and sales.
  • Integrate with Other Product Pricing Strategies - If a business has a preferred pricing method, they can compare their formulated cost with market prices to ensure it's reasonable. By combining this method with other pricing strategies, businesses can stay ahead of competitors and better establish their profit margins.

Disadvantages
  • No Longevity - Competitor pricing is ideal for businesses starting out and seeking to attract customers quickly. However, as competitors in the industry continue to innovate according to their sales data, the startup business will not find the same success. Although this is excellent for short-term profit goals, companies need to use the influx of data to create pricing and marketing strategies to suit their needs.
  • Emulating Competitor's Mistakes - Using this model may create the same mistakes in the startup as the model competitor. Yet, the competitor will have the advantage of the extensive sales, inventory, and demand data to make improvements based on their larger client base.
  • Blending in with the Competition - Businesses that solely base prices off of market costs do not stand out from the crowd. Companies selling similar products within an industry need to have unique elements to attract consumers.

Things to Consider When Calculating Competitive Pricing

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A business wanting to utilize the pricing schemes of surrounding companies should realize the types of competitors to consider, such as-

  • Direct competitors - Businesses that offer similar goods and services, competing directly in the same market.
  • Indirect competitors - Businesses that offer products and services that share some qualities but are not technically in the same market. For example, companies that provide phone cases are in the same industry as cell phone producers but don't directly compete against them.

Considering these two types of competitors gives businesses a well-rounded price that helps them stand out from the direct competition while relating to indirect competitors. This price tag can be above, below, or equal to market costs, as long as the business understands the implications of each option.

Businesses choosing to price products and services at a premium, or above market costs, must offer the best quality among competitors. Marketing tactics must also heavily promote the difference in quality between their product and other products on the market.

Similar products sold at the same prices tend to blend in throughout vendors. Therefore, businesses must be careful when choosing to emulate competitors' prices. Creative marketing strategies and offering unique shopping experiences can help a company stand out.

If businesses are experiencing less than ideal traffic flow, they can implement a loss leader. A loss leader is a discounted item or service priced below market cost to attract customers and increase the potential of selling other related products. Loss leaders can boost traffic, stock turnover rates, and sales, but relies on the transactions of other items to boost profit margins.

Companies should have a strong understanding of their competitors' products, demand, and pricing to optimize their strategies. Insight on how related businesses generate high traffic, sales, and profits can help new businesses implement initial price points. As the company grows, these prices can be adjusted by combining the competitive pricing method with other pricing strategies.