Competitive Pricing: Definition, Strategies and Tips
Updated June 24, 2022
Working in sales, marketing and business requires individuals to develop methods to maintain or expand product sales margins. Businesses use competitive pricing to enhance sales for products similar to those of their competitors. By researching more about competitive pricing, useful strategies and pricing options, you can enhance your credentials at work and impress employers during interviews.
In this article we define competitive pricing and what jobs use it, review competitive pricing options and tips for competitive price strategies and highlight the advantages and disadvantages of competitive prices.
What is competitive pricing?
Competitive pricing is a type of pricing strategy where businesses establish market prices for their products that are the same as market prices for similar competitor products. An example of this would be if one electronics company priced their new tablet at $300 instead of $400 because their top competitor sells their tablet for $300. Similarly, the electronics company could decide to sell their tablet for $350 instead of $400 if it had more features than that of their competitor.
The goal of using competitive pricing is to maintain profit margins when multiple businesses sell the same type of products or services.
What jobs require knowledge competitive pricing?
There are a variety of jobs that require professionals to understand competitive pricing and develop competitive pricing strategies. Here are some examples of job positions that involve competitive pricing:
A pricing analyst's primary job is to conduct research and help businesses develop competitive prices. They consider what types of competitive pricing would work best for a business while also determine what prices would give them the best competitive advantage.
These professionals design products and determine the materials, production time and labor necessary to create the product. Because of their role, they provide insights into the range of market prices to sell a product for.
Manufacturing specialists determine the production process for a particular product and how to mass-produce it. They help develop relative manufacturing costs that affect market pricing.
Market research analyst
This marketing professional completes research on company competitors, consumer demographics and industry trends to assist in marketing efforts. They also coordinate with the marketing and sales teams to provide updates on new competitor products and market prices.
Accounting managers manage department employees and overseeing all costs related to business operations. Because they understand what it costs to operate the business, they can offer insights into product pricing.
Competitive pricing options
The right competitor pricing option can be different for every business depending on their brand popularity, product offerings or scale of operations. Here are three competitive pricing options and explanations for why a company would choose one over another:
Set prices below competitor prices
Businesses typically choose market prices below that of their competitors because of one or more factors. They might decide to go with a lower market price because they know they have less-quality products to offer. However, they might also set lower market prices if they don't see an improvement in sales after aligning their market prices with their competitors.
Set prices the same as competitor prices
When a business sets the pricing of their products at the same amount as their competitors, they aim to increase sales and level themselves with their industry competition. Businesses also set the same market prices to determine whether their pricing was too high in the past, or whether they need to identify another area that affects sales. This could include marketing efforts, customer service, product quality or product design.
Set prices above competitor prices
A business sets market prices for their products above competitive prices when they believe their products have heightened quality that consumers will pay more for. They also raise their market prices when they know that their products are more widely available than their competitors and they have a stronger customer base.
Tips for competitive pricing
When determining competitive pricing, business owners and sales professionals need to consider whether it's the right option for their business. Review these competitive pricing tips:
Lower manufacturing costs before lowering market prices
The cost of production is a major factor in the market prices businesses can sell their products for, while still making a profit. Therefore, businesses first need to figure out if they can maintain product quality while lowering manufacturing costs to a level where they could sell products at or below those of their competitors.
Assess target customers' needs beforehand
Sometimes consumers don't care about pricing and instead care more about product quality or using well-known brands. That's why it's important for businesses to consider what factors keep customers re-purchasing and whether competitive pricing is necessary.
Research multiple competitor's pricing options for similar products
When considering a competitive pricing option, businesses should review the market prices of other industry competitors beyond their primary competitor. This allows them to visualize the range of pricing for the same product and whether other businesses are trying to match top-competitor pricing.
Know when to use a different pricing strategy
Competitive pricing isn't always the pricing strategy a business needs to obtain better profit margins. For this reason, businesses should determine whether another pricing strategy would better benefit their needs to maintain product quality and customer satisfaction.
Related: What Is a Pricing Strategy?
Competitive pricing advantages
There are several advantages of competitive pricing. These are a few examples of how competitive pricing can benefit a business:
Maintains customer-base despite competitor offerings: When businesses already have a strong customer base, engaging in competitive pricing can help safeguard their loyal customers when a competing business sells the same products for lower prices.
Levels businesses with their market competition: For businesses trying to accomplish the same amount of brand recognition and customers as their competitors, competitive pricing allows them to convert customers from their competitor's products to theirs.
Provides opportunities for increased revenue: If a business hasn't seen success with similar products, lowering the market price might help improve sales and deliver higher profit margins.
Related: What Is Perfect Competition?
Competitive pricing disadvantages
Look over these potential disadvantages of competitive pricing to enhance your decision-making in your sales or marketing job:
High-risk for small businesses: Small businesses may be at high-risk if they engage in competitive pricing. This is because they need to meet their profit margins to maintain operations and by reducing product pricing, they lower their profit margins too.
Less-quality products because of lower manufacturing costs: In lowering market prices to compete with competitor pricing, businesses may have to reduce their production standards and the materials they used to create their products. This could cause customer dissatisfaction and could mean losing valuable customer support.
Loss of revenue: Businesses can also potentially lose revenue by lowering their product prices to match those of their competitors, especially if they don't see improved sales and lower their manufacturing costs.
Related: What Is a Competitive Analysis?
Frequently asked questions about competitive pricing
Review these frequently asked questions and answers about competitive pricing to maximize your knowledge of the topic:
What is the difference between competitive pricing and penetration pricing?
The differences between competitive pricing and penetration pricing are strategic use and the circumstances for using them. For example, competitive pricing is the process by which businesses seek to adjust their product prices to match those of their competitors. The primary goal of businesses using competitive pricing is to increase their customer base and leverage themselves against the competition in their industry.
In contrast, penetration pricing is the process by which a business introduces a new product or service offered by few competitors and sets the market price well below average. The primary goal of penetration pricing is to set prices so low that competitors won't try to enter that market.
What is a competitive pricing analysis?
Competitive pricing analysis is a research method that businesses use to assess consumer feedback to their competitors' previous competitive pricing activities. This helps businesses gauge a potential response to increasing or decreasing product prices and whether it will influence consumer spending habits. Competitor pricing analysis focuses specifically on consumer reaction instead of how competitive pricing will affect their profits and business operations.
How often do businesses change their competitive pricing?
The time-frame for businesses to change their prices depends on business needs and financial factors. However, most businesses make adjustments to their pricing each year based on surplus inventory, market changes or profit margins.
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