What is Competitive Pricing? Definition, Strategies & Example

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Reading Time: 4 minutes
  • What do you need to know about competitive pricing?

What is an important criterion in customer purchasing behavior? Certainly, it’s price. The majority of times, our purchasing decisions are based on price. And that’s why, setting the right price takes on enormous importance. However, pricing for ecommerce is not a cakewalk. Generally, price sensitivity, competition and costs are major considerations when it comes to pricing strategy. While needing to account for competition with other sellers, it is essential not to de-value products. It is certainly a tricky job.

With the proliferation of online shopping in today’s highly mobile and digital world, the competition in the market is on a constant rise. That makes it essential for businesses to be keen on their competitors. How you set prices is a key point in today’s competitive edge. Competitive pricing strategy is one of the major pricing strategies for Ecommerce .

  • What is Competitive pricing?

Competitive pricing strategy

Is it all about monitoring the prices of competitors?

Competitive pricing strategy is not at all about price matching and undercutting competitor prices. It is setting the price of a service or product based on what the competition is charging. It is much more than just possessing an overall idea of the prices charged by competitors for services or products. It is also essential to have a strong knowledge of the trends in which services/products prices have been increased or lowered by them.

When a service or product price is set in reference to what the competition is charging, it is called as competitive pricing. Generally, this pricing strategy is used by businesses selling similar products, as the attributes of a product remain the same; however services can differ from business to business.

product life cycle

When establishing the appropriate pricing strategy, it is essential to have a look at the product life cycle. Defining which stage your product is in will help you set prices accordingly. Certainly, if your product is in the development stage, then what is the point in focusing on competitive factor? However, if you have a product line, which contributes to a mature market, with comparatively high competition and substitutes, then you can price your products either same as your competitors or higher.

 

Now, according to the competitive pricing strategy, 3 different stands can be taken:

    • Pricing similar products higher than what your competitors do, need that your product has something special to offer. Improvements and new product features can explain why you are charging a higher price. For example – special customer care, installation, delivery or adding more years of warranty can also mark distinction and explain the price difference between similar products.
    • Pricing lower than what your competitors are charging depends on your resources. This kind of strategy is appropriate for you if it possible for you to maintain and increase the volumes with no sudden rise in costs. This strategy involves risk of diminishing your profit margins and might lead to a loss. Hence, it is essential to identify competition and evaluate competitors and what they are up to. This is a key point in the process of setting the price. Following available financial reports and gathering information regarding the topic can be helpful to evaluate if this kind of strategy works for your business or not. Prior to lowering prices, it is preferable to reduce costs to maintain stable cash flow and profit margin into the business.
    • Pricing similar to what your competitors are offering diminishes the distinguishing factors. However, this kind of strategy helps put the focus on your product. If you are selling a product with more features at the same price, then it is likely to be successful in the market.
  • Example:

Example

The competitive pricing concept is better understood when there are only 2 competing parties. If there 2 companies manufacturing toothpaste, both are likely to charge the price equally. However, if company A wants to compete with the other, it will promote toothpaste with its features saying why the product is better.

Competitive strategy is used by some corporate giants when they want to enter a new market. In such cases, setting the price almost equal to their competitor becomes essential, even though the production cost is higher. If the production cost is higher, it is essential to adjust prices of marketing, advertising, distribution and packaging.

Some companies employ competitor based pricing strategy, as usually the price is the prime consideration while purchasing a product and the switching cost for purchasing a product from 2 different stores is extremely low. On the other hand, when it comes to cases like software, it is not feasible to set prices just by considering competitor’s behavior or data as the central factor. Several other variables need to be taken into consideration in this case.

Though the competition factor is important while determining prices, it should not be thought as the central pillar. When it comes to establishing pricing, rather than just thinking about the product that you want to sell online, think about the value it supplies. It is essential to step into your customer’s shoes for a while and think from a customer’s point of view about your business and products.  Why will one buy your products as opposed to what your competitors are offering? What makes your product stand out in the competition? This will help you set the right prices accordingly.

All in all, pricing is the powerful tool that can make or break your business. If you want to be successful and competitive, consider every aspect discussed above and then set strategy that suits your business needs.

Still have any doubts? Feel free to ask in the comments below:

To know about value-based pricing, read the following article: