How To Create A Competitive Pricing Strategy

A competent business with effective competitive pricing strategies can directly result in an increased market share, higher customer retention, and enhanced profit through volume sales. But not every business owner understands its value when they’re first starting out. This makes them fail to understand the importance or best practices of utilising competitive prices backed by a strong strategy, which can have the opposite effect, including brand value erosion and being dragged into price wars.

But what is a competitive pricing strategy? In this article, Real Business will go over the benefits of a competitive pricing strategy based on consumer demands and market insights, including the best practices to employ, and examples of them working – so your business can understand and create a strategy of your own.

What Is Competitive Pricing?

Competitive pricing revolves around setting prices based on your competitors’ prices, meaning it relies on regular monitoring and analysis to stay up to date. Depending on the specific market position a business is interested in holding, they may choose to do so either through direct price matching, undercutting or setting prices just above a competitor.

Basing your products or services on competitor pricing has the following benefits:

• Attracts price-sensitive customers – Competitor pricing can attract customers who frequently compare prices between companies, either looking for lower prices or a higher value proposition.
• Maintains market position – Aligning with competitor prices means maintaining your position in the market without being priced out, something that is very common in markets where similar products or services are abundant.
• Supporting brand’s perceived value – Whether you’re aiming to be seen as a company that offers lower prices for the same or similar products/services as your competition, or you’re trying to position yourself via premium pricing, competition-based pricing can signal your brand’s focus by giving them a reference.
• Prevents loss of market share – The vast majority of customers tend to seek the best price available to them at the time, and you may lose market share if you don’t employ a competitive pricing strategy to avoid being undercut.
• Encourages customer loyalty – Price matching can build customer trust, as customers feel assured that you’re looking out for them when you match competitor pricing, as well as being an avenue to take the decision-making out of their shopping.

Examples Of Competitor Pricing

• Airlines – Airline industries often employ this pricing strategy, matching and undercutting other airline companies. A famous and insightful example is the 1992 price wars between American Airlines and Northwest Airlines, each offering discounted fares to match or undercut their competition. These two companies continued doing this until price cuts reached so low that sales began to break records, but the low price of these sales incurred significant losses for both of them. The reason why was that both airlines offered similar routes and experiences, meaning pricing strategy was the only avenue they could take to remain competitive. Competitive advantage means more than having a superior competitor-based pricing strategy, you need to have a better product ultimately – one that customers keep coming back for.
• Retail electronics – Retailers such as Currys and Argos will often monitor and employ competitive pricing strategies against each other. This is because electronics prices are easily compared online, easily verified for quality, and often have a big price tag associated with them. Competition-based pricing, as well as simply offering discounts on prices, goes a very long way in capturing customer attention.

Types Of Competitive Pricing Strategy

The following are the types of competitive-based pricing strategies companies engage in:

1. Price matching strategy – Price matching is as simple as can be – it endeavours to mimic the same price of items as competitors. This simple method is passive but also ensures that the likelihood of customers choosing competitors based on price alone drops dramatically. It also enhances brand loyalty, fostering a sense of care and reliable value for money.
   • Cons – Reducing pricing flexibility can result in loss of profitability, as well as leading to a race to the bottom if competitor pricing keeps dropping.
   • Favoured industries – Electronics retailers, grocery stores and home improvement companies
2. Dynamic pricing strategy – Dynamic pricing is flexible, and adjusts prices in real-time, based on changing market conditions, competitor pricing, and demand. This maximises profitability according to demand peaks and competitor pricing rates, and the infrastructure that allows you to dynamic price also gives you high flexibility in the market.
   • Cons – A dynamic-based pricing strategy can lead to customers feeling dissatisfied and lowering loyalty. Furthermore, the technology that allows this method is costly to establish and maintain.
   • Favoured industries – Companies in airlines and hospitality use this method to take advantage of peak times and surges in demand, which is why it’s always far cheaper to book in advance in these industries.
3. Penetration pricing strategy – Penetration pricing strategy involves entering the market with a low initial price to attract customers quickly and establish your market share, before raising the prices later as the business gains brand loyalty.
   • Cons – The initial lower prices bring the risk of low profits or even losses. Also, once the prices eventually rise, you either need additional USPs or brand loyalty to maintain your market share.
   • Industries – Platforms such as Disney+ use low introductory prices to build subscriber bases against their competitors’ prices, such as Netflix, which had a huge market share at the launch of Disney+.
4. Predatory pricing strategy – This competitive pricing strategy revolves around temporarily setting prices low to eliminate competitors. This pricing strategy has been used against competitors when the business in question has a lot of capital to stay afloat, as well as to take advantage of companies that are going through financial hardship. Once competitors have exited the market, the business then can raise their prices and enjoy market dominance.
   • Cons – Some forms of predatory pricing may result in a violation of anti-competition laws, so oversight for legal experts is highly advised. Furthermore, if you do not have the capital or other revenue sources to stay afloat, you may suffer far too much financial loss to recover.
   • Favoured industries – Large retailers have been accused of using this method to eliminate multiple smaller competitors at once. That being said, Uber is most definitely a company that has used this to great effect to eliminate local taxi services.
5. Price skimming – Price skimming is a strategy that involves businesses starting with a high price, and lowering it over time. Although this may seem counterintuitive, innovative products or services with high interest from those who value being early adopters are willing to pay the premium pricing. This maximises profit and allows companies to capture a broad market over time by working down the list of customer segments.
   • Cons – Failure to properly judge an accurate estimate of ROI could lead to delayed profitability, and risks alienating customers who may feel cheated when prices drop so shortly after launch.
   • Favoured industries – Companies within the technology industry, such as Apple, often launch new models at premium prices.

How To Conduct A Competitive Price Analysis

The following will be a step-by-step process to finding your competitors and taking notes, to later use in your competitive pricing strategy:

• Market scan and note – Research your industry and list the businesses that offer similar products or services to you, whilst surveying where your target customers shop and compare products to understand their perspective.
• Price comparisons – Use price comparison tools such as Price2Spy, Competera etc. for automated price tracking. Once you use your tool to pull pricing data from competitor sites automatically, use the features of said tool to adjust the frequency of updates to your liking, whether that be daily, weekly etc.
  • Note – Monitor the competitor’s pricing strategy, as in when they make adjustments to their prices, and note how similar each competitor is. This lets you understand how passive or aggressive the market you are in is. Also, always note the reason why you think the price points for each product or service that show extreme fluctuations, or extreme passivity. If you don’t have a reason, consider asking an expert.
• Analyse historical price data – Whilst historical price data can become outdated as market conditions shift, they are useful to find trends such as discount timing and peak sales periods to take advantage of. Sometimes, starting the lower price period early, such as during a seasonal theme (Christmas etc), can attract customers who are saving for the moment.
• Mark competitors’ pricing strategies – Through active monitoring, or historical study, try to identify the specific pricing model your competitors are using, and tag them. They may use different ones per product or service. Ensure to review them over time, making notes on differences in otherwise identified patterns.
• Evaluate price position – Determine where each of your competitors sits in the market. Do they cater to cost-conscious consumers, focusing on affordability through lowered production costs? Do they have a premium price for a quality product? Or perhaps they’re seated at the middle ground, identifying as the standard within their industry.
• Identify successful indicators – Just as you may have come into a lucrative period of success, your competitors will also. Data from market analysis tools go a long way in identifying success via sales rates etc. Their pricing strategies during these periods will tell you a lot about them, and the industry itself.
• Benchmark against your prices – Analyse gaps and/or differences in your current marketing approach, assessing areas in which your competition beats you and why. The best defence is a good offence, and if you can identify opportunities that will divert customers away from them and to you, such as via discounting or price matching during their successful periods, you can take their market share. Customers will always spend capital on things they value, the only question is where and why.

Steps To Identify A Competitive Pricing Strategy

With all of the data you have gathered, what’s left is to identify a strategy that will work for you.

• Define priority competitors – From your analysis, focus on the most direct and significant indirect competitors (same product competitors vs alternate solutions competitors) in your target market. These will be those that use specific competition-based pricing strategies to steal away portions of the market that would otherwise come to you.
• Determine market positioning and brand value – We want to do this to launch a counterattack. Based on your perceptions of these competitors so far, position your brand to either match the price points of your competitor, or if they’re low cost/premium, position as the opposite. This will require working on your service or product to realise these customer expectations, but only the most loyal of your competition’s customers will likely not consider trying.
  • Additional tips: Incorporate customer-attracting practices that you have identified as working in your competitor analysis, tweaking them to match your USPs and brand image to stand out from comparable offers.
• Set price points based on market analysis – Use the data you’ve gathered about your competitor’s prices to set your own. Decide on whether matching, undercutting or going premium best meets your positioning and brand image whilst also planning seasonal and promotional-based pricing. This can also be gleaned from your competitor’s timing and tactics, marking the periods they do their price shifts.
• Adjust production costs – Of course, deciding to go premium pricing or even standard price points will affect production costs. Always ensure they are sustainable.
• Execute your competition-based pricing strategy – All you can do outside of simulations is the real thing. Ensure you or your team are ready to make adjustments immediately and monitor the results. Track sales volume and revenue, and adjust your methods as necessary to keep profit margins high.

Conclusion

Competitive pricing strategy is a lot of work, especially when starting. Give yourself room for error, and ensure your product or service costs are sustainable. This is because it will take a lot of practice, and possibly even losses before you find your position in the market. Don’t give up, or be afraid to try other pricing strategies that align with your brand.