Competitive pricing enables businesses to take advantage of their market by basing product prices on the competition instead of the cost to produce finished goods. It’s a handy sales strategy to keep in your business toolbox – and can be essential to success in highly competitive markets.
In this article, we do a deep dive into competitive pricing to outline key strategies, how they impact your profit margins, and how competitive pricing works with real-life examples.
Competitive pricing definition
Competitive pricing is a sales and marketing strategy that involves manipulating price points in a business to match or beat the pricing of its competitors. The purpose of a competitive pricing strategy is to attract more customers and increase market share in online and offline markets.
Also known as competition-based pricing or competitor-based pricing, competitive pricing strategies typically involve analysis of historical sales data, customer demand trends, and production costs.
Competitively priced goods
Competitively priced goods are products or services that are offered at a highly competitive rate – in line with or, more commonly, below the market rate. The aim of pricing goods in this way is to get ahead of competitors, attract sales, and convert buyers into repeat customers.
Industry examples of competition-based pricing
Competitive pricing is a popular strategy across multiple sectors – particularly those that cater to saturated markets, where standing out is critical to success.
Here are three common examples of competition-based pricing in business:
- Ecommerce marketplaces. The low barrier to entry makes the eCommerce sector especially competitive, with major outlets like Amazon using pricing algorithms to ensure agile pricing. These sorts of algorithms have been criticised for hiding the best deals from customers. Competition-based pricing can help improve eCommerce sales.
- Ride-sharing services. If you’ve ever used ride-sharing apps like Uber, you’ll be familiar with the surge in cost when demand is higher. These companies rely on real-time data to ensure their pricing is competitive when demand is low – but switch strategy when demand is high.
- Coffee chains. Coffee chains like Starbucks are known for their pricing strategies. Starbucks is slightly different, however, in that it takes a premium-based strategy relative to its competitors. In other words, it will price its products above others in the market to position itself as a premium outlet.
Competitive pricing advantages and disadvantages
There are clear advantages and disadvantages to competitive pricing. Any decision to change your pricing will need to be made with full clarity around the risks and rewards. We have outlined some of these upsides and downsides below.
Competitive pricing advantages
Competitive pricing is a relatively straightforward pricing strategy. It’s a quick solution for going to market with a new product that meets customer price expectations and can help improve profits and revenue.
Here are four more benefits of competitive pricing:
- Attracts customers: Competitive pricing helps you prevent the loss of customers to your competitors while attracting new customers specifically seeking out competitively priced goods.
- Grows market share: Similarly, equal or cheaper pricing can inspire consumers to switch from your competitor’s brand to yours. By monitoring price positions you can also respond to every change they make, further bettering your positioning in the market.
- Creates loyalty: Well-priced products draw in loyal customers and allow you to create a long-lasting relationship with them through optimised marketing strategies and a better awareness of what your business offers.
- Drives brand awareness: Competitive pricing often leads to ‘word-of-mouth’ sales – customers spreading the news about your products without being asked. This drives higher engagement with a broader customer base.
Competitive pricing disadvantages
When we asked the co-founder of BizReport, Young Pham, about the biggest challenges of pricing products competitively, he had this to say:
“Once you get undercut, it’s very difficult to adjust because you are not sure of the real reasons why your competitor is selling cheaply.”
In addition to competitor undercutting, Young told us that supply chain risks and bottlenecks can increase the cost of doing business unexpectedly – ultimately affecting how competitively you can price your goods.
Here are a few more disadvantages of competitive pricing strategies:
- Profit squeeze: Competitive pricing often squeezes your profit margins. Before embarking on a competitive pricing strategy, ensure your business is healthy enough to absorb tighter margins.
- Brand damage: Stella Artois’s advertising line, ‘Reassuringly Expensive’ resonated for a reason. Pricing products below market rate can mean customers consider the brand to be cheap and unappealing.
- Long-term sustainability: Following a competitive pricing strategy can challenge long-term sustainability. Market prices generally sit at a certain level because that is a viable level for those in the sector. Undercutting these prices could create risk for the ongoing viability of the business.
- Risk of triggering a price war. Competitive pricing from one player in the market can trigger a price war, whereby another competitor undercuts the new price and the original mover’s pricing benefit is lost. This can be difficult to navigate as there will be little insight into a competitor’s financial ability to maintain the pricing pressure or absorb lower profits.
- Pricing inflexibility. Once a decision is made to drop a price for competitive reasons, it can be hard to drop it further – and you may also find it difficult to increase the price back to its original level.
How does competitive pricing affect consumers?
Competitive pricing offers positives for customers. But there are some negative effects too.
The positive effects include:
- Competitive pricing means far better value for money for the consumer.
- There are more choices of suppliers for the customer to choose from.
- Competitive pressure between businesses can lead to greater innovation.
The negative effects include:
- In some cases, the quality will diminish as businesses seek cheaper suppliers, cheaper raw materials, or cheaper components to reduce production costs.
- Similarly, businesses may reduce staffing costs which can mean poor customer service in exchange for cheaper goods.
- Some businesses may not be able to absorb the limited profit margins and collapse, enabling large corporations to effectively take over the market.
Types of competitive pricing strategies
Competitive pricing strategies can be classified into three categories:
- Lower price strategy. Your products are cheaper than your competitors’. This is generally achievable by bulk-producing items to lower production costs and create economies of scale.
- Higher price strategy. Your products are more expensive than your competitors’. This strategy works best when you offer features or benefits your competitors' products lack, or your brand is more reputable for quality goods.
- Matched price strategy. Your products match your competitors’ prices. In this case, you rely on differentiation in product development or marketing to encourage consumers to select your brand over other options.
Under each of these categories are several competitive pricing strategies that you can use to grow revenue and increase market share. Let’s look at some of the most popular types now.
1. Price skimming
Price skimming is when a business introduces a new product to the market and initially sets the price high, then lowers it over time. This strategy is used to attract consumers willing to purchase at any cost – think, early adopters of the latest iPhone – then gradually broaden the customer base through lower pricing.
2. Price matching
Price matching is the strategy of setting prices equal to a competitor’s offering. It’s often found in retail stores, where customers are encouraged to evidence cheaper pricing, which the business will then match.
3. Penetration pricing
Penetration pricing is when a business brings a new product to market and offers it at a low price. The intention is to penetrate the market with the new product, draw customers in with the price, build brand awareness, and ultimately expand market share.
4. Loss leader pricing
Loss leader pricing involves intentionally selling attractive products from your product portfolio with minimal profit – or at a loss – to attract customers. This strategy focuses on the acquisition and lifetime value of customers, with the hopes that the low-priced goods will encourage consumers to make additional purchases of goods with higher margins.
5. Premium pricing
Premium pricing is when a business sets its pricing higher than its competitors to position the product as high-end and higher quality. The aim is to create a sense of exclusivity while also pocketing a healthy profit margin. Luxury travel and clothing brands are good examples of where premium pricing strategies can be effective.
How to set a competitive price for your products
According to Lisa Richards, CEO and Creator of the Candida Diet, setting a competitive price for your products requires a holistic understanding of your competitors’ pricing strategies.
“Don’t just focus on your competitor’s prices,” Lisa explains when asked about competitive pricing analysis. “Take note of the quality of their products, customer loyalty, reviews, brand perception, and product characteristics, and how these factors have affected their pricing decisions.”
Let’s break down the fundamental steps involved in competitively pricing products.
1. Analyse your competitors’ pricing
The first step to setting a price is to audit the competitive landscape.
Competitive pricing is based on being able to undercut the competitors, so assessing rates across the market will allow you to figure out how you can position your business offer.
Consider direct competitors offering the same product as you and indirect competitors offering a similar product. Analyse their pricing strategies, including any deals, discounts, and customer loyalty offers.
2. Assess market conditions
Broader market conditions will also factor into pricing decisions. For example, if costs are rising or a recession appears likely, it may not be the optimum time to introduce competitive pricing as it could cut too deep into your business margins.
On the flip side, if the market appears buoyant, it could be a good time to undercut the competitors and take advantage of higher turnover.
It should be noted that these are just hypotheticals: a recession might be the perfect time to introduce competitive pricing and bring in more customers.
3. Understand customer demands
Customer demands should be assessed alongside market conditions. Analysis of customer trends – both historic and forecasted – should give insight as to how sales will perform at different price points.
For example, if a particular item is hugely popular at a point in time, it may not be the best item to price competitively.
You may also want to survey customer perceptions around pricing and consider how a customer perceives your brand and its unique selling proposition.
4. Consider your overarching business strategy
Pricing decisions will also depend on your business’s broader business strategy, including profit margins.
You need to have a clear understanding of the business’s costs to ensure any change to the pricing strategy works in the long term. This means understanding all supplier relationships, production and labour costs, and sales potential.
Competitive pricing may mean the business will need to absorb tighter (or negative) margins on some products as part of its wider business strategy and market positioning.
5. Identify your price point
Once you’ve collated the relevant information to analyse, the first thing to do is identify your price point.
Do you want to severely undercut the competition to shift products and gain customers? Or would you rather offer a matcher-type deal that attracts customers but avoids setting off a price war?
6. Consider time frames
Once your price point is set, you’ll need to consider how long you will keep the product at that price.
You may want to set a limited timeframe to maximise sales and create a buzz. Alternatively, you can take a long-term view of the pricing for broader strategic reasons (such as creating a loss-leader position in the market).
7. Set regular audit dates
As you assess the price point and your time frame, you’ll need to figure out regular ‘check-in’ points to understand how the pricing strategy is working.
If you are undercutting the competition but not seeing the customer or sales uptake you expected, the pricing strategy might need adjusting.
Any pricing action you take may trigger a response in the competition which you will need to identify and consider in your ongoing strategy.
8. Pivot if necessary
Be prepared to pivot your strategy if the above steps indicate you’re on the wrong track. This means stepping back and reconsidering your competitive pricing.
Agility is one of the greatest attributes in modern business practice and the ability to switch thinking is key to maintaining a competitive advantage.
Pricing strategy tips for product sellers
So, with all these strategies available, which is the best to follow? Here are some tips to get you started with your pricing strategy.
Calculate price elasticity
By calculating price elasticity (using historical sales data), you gain a better understanding of the sensitivity of customer demand in relation to pricing changes. High price elasticity indicates that small price changes can greatly impact demand, while low price elasticity means customers are less sensitive to fluctuating prices.
Run a ruler over your costs
You need to know how much financial flexibility you have in your business before committing to a new pricing strategy. Consider all aspects of your business: production, distribution, and marketing. A clear understanding of your financial position should inform any decision around cutting profit margins.
Be clear on your broader business strategy
You’ll need to have a long-term strategy in place that your pricing strategy supports. If competitive pricing is a long-term play, you’ll need to ensure the business can sustain it. Or, if it’s a short-term strategy, you’ll need to understand the impact of reverting to non-competitive pricing.
Thoroughly investigate your competitors
Competitively pricing products requires deep research into your competitors and their pricing strategies. You’ll need to have a really deep understanding of your competitors’ strategies, their financial sway, and their ability to take on your business in a price war.
Monitor the market and remain agile
Remember: your competitors are adjusting their pricing strategies too. Monitor prices across the market and ensure yours change with the tides so that you can continue to execute your strategy. If your prices are not bearing fruit as expected, be prepared to make changes.
Competitive pricing examples
Competitive pricing is a strategy that involves many moving parts and requires careful planning. We checked in with Ryan Mckenzie – co-founder and CMO of leading eco-friendly household products brand Tru Earth – to see how competitive pricing works in a real-life example.
Competitive pricing example: Tru Earth
Tru Earth operates in a highly competitive market where pricing directly impacts success. Ryan tells us that one of the most significant pricing challenges is accurately identifying the costs of production.
“Overlooking or underestimating [cost of goods sold] can result in under-pricing,” he explains, “ultimately leading to loss of potential profits or even revenue deficit.”
The solution? A “meticulous examination of all costs.”
Ryan’s team conducted an in-depth audit of their manufacturing processes to spot inefficiencies that can be improved to reduce the cost of goods sold and create room to competitively price products.
“It also allowed us to precisely calculate our break-even point, which informs the setting of an appropriate profit markup to arrive at the final selling price.”
To further optimise pricing, Tru Earth regularly analyses sales data to discern patterns and trends that enable calculated price adjustments.
“We use data to simulate demand elasticity, hypothesizing price changes against the projected effect on sales volumes. A/B testing different price points systematically can also provide critical insights.”
This example of competitive pricing demonstrates the multi-faceted nature of pricing strategies. Ryan believes it’s less of an exact science and more of an ongoing dance of combining data and intuition and then continuously refining the balance.
“Remaining flexible and adaptable are key characteristics of success in the volatile realm [of competitive pricing].”
Familiar competitive pricing examples
Competitive pricing strategies may be more popular than you realise; you’ve likely encountered one or more examples of competitive pricing being used to attract customers.
Here are three examples of industries that embrace competitive pricing strategies:
- Competitive pricing in the airline industry. Airlines often offer grab-a-seat bargains to customers to fill seats that might otherwise be empty on certain routes. Competitive deals and offers are common in the aviation sector and attract price-conscious travellers and spontaneous purchasers.
- Competitive pricing in fast-food chains. The fast-food sector frequently offers bargains such as value deals and extra-cheap sides. The fast-food industry is highly competitive, and prices are kept at low levels to draw in customers.
- Competitive pricing in the technology sector. Big tech companies like Apple can get away with high pricing thanks to the brand’s popularity, their marketing differentiation, and the perceived value of their products. Meanwhile, Samsung and other mobile phone vendors have been known to participate in competitive pricing to maximise profits and win customers.
How to do competitive pricing analysis
A competitive pricing analysis can be performed by following five simple steps:
- Identify your competitors
- Analyse customer trends
- Observe competitor pricing strategies
- Evaluate brand positioning
- Understand your costs
Let’s break that down.
1. Identify competitors
First, know who you are up against. Draw up a list of both direct and indirect customers in your target market space. Analyse their performance and positioning to better understand how you’re able to price products relative to them.
2. Analyse customer trends
To put your competitive pricing analysis into context you must develop a deep understanding of your target market. When are they most likely to buy? When do they expect discounts? Where do they prefer to shop? Build a forecast that demonstrates how purchasing behaviours may change or shift throughout the year.
3. Observe competitor pricing strategies
Take note of all the market pricing strategies you can see in the market, including any you discover during this information-gathering stage. For example, if one business cuts its prices, do others follow? If so, who – and to what extent?
4. Evaluate brand positioning
Consider where your company and each of its competitors sit in the market. Are you the luxury option or the cheap option? Which audience segments does Competitor A serve better than Competitor B? Keep this information in mind when setting prices.
5. Understand your costs
To accurately determine how much pricing flexibility you can afford, you need to know exactly how much goes into your cost of production and cost of sales. Implement inventory management software with reporting features to break down accurate cost of goods sold (COGS) across the business – this allows you to be certain about the profitability of each product you sell.
What is competitive pricing intelligence?
Competitive pricing intelligence is when you gather information on your competitors. It’s helpful when deciding what pricing strategy to implement.
You can gather information on competitors by analysing how they position themselves in the market (including by looking at price, advertising slogans, and outlets), running brand awareness and customer perception surveys (showing how your brand is recognised relative to others), and considering all publicly available information, such as annual reports and public commentary.
