When to use competition-based pricing: Advantages

What’s the pricing strategy to staying competitive while still making a profit? For many businesses, it’s competition-based pricing. This method involves setting your prices based on what your competitors charge, rather than just your costs or customer demand.

Why is competition-based pricing effective? It helps you understand your market better and make smarter pricing decisions. This approach can improve your position in the market.

List of advantages of competiton based pricing

Improved competitive positioning

One significant advantage of competition-based pricing is that it allows pricing managers to improve their company's positioning in the market. By pricing products or services similarly to competitors, you can avoid the risk of appearing too expensive or too cheap. It also allows you to gain an understanding of the competitive landscape, which can help you identify areas where your product or service offering is falling behind. You can then take steps to improve your offering and pricing in line with your competitors.

Reduced price wars

Another advantage of competition-based pricing is that it can help pricing managers avoid price wars. When businesses are competing on price, they often engage in a race to the bottom, lowering prices without regard for profit margins. With competition-based pricing, you can avoid this risk by staying in line with your competitors' pricing. This ensures that you are not unnecessarily lowering prices and eroding your profit margin.

Improved customer perception

Pricing based on competition can also help improve customer perception. Customers are often looking for the most competitive price, and pricing in line with competitors shows that your business is up to date and competitive in your industry. This alone can provide a significant boost for your brand and help increase customer loyalty.

Easier implementation

Competition-based pricing is often easier to implement than other pricing strategies. There is no need for complex calculations or predictions of demand as you are simply following the pricing trends of your competitors. This means that pricing managers can make quick decisions and adjust pricing as needed to meet market changes.

Increased revenue

Finally, competition-based pricing can help increase revenue. By pricing products or services similar to your competitors, you can ensure that you are not pricing yourself too high or too low. This helps you avoid losing sales to competitors. Additionally, if your products or services offer additional benefits or features, you can price them higher than competitors. This can help increase revenue while still remaining competitive in the market.

It is important to consider the advantages of competition-based pricing. This pricing strategy can help improve your company's positioning in the market, reduce risk of price wars, improve customer perception, make pricing decisions faster, and increase revenue. By keeping an eye on your competitors' pricing and adapting your pricing strategy accordingly, you can ensure that your business remains competitive and profitable.

When is the competition based pricing strategy right for you?

A competition-based pricing strategy is right for your business if it aligns with these conditions. Then a competition-based pricing strategy can help you stay relevant, attract price-sensitive customers, and maintain a competitive in the market:

1. Highly competitive market: Your market has many similar products or services, and price is a key differentiator for customers. Customers are price-sensitive and frequently compare prices between competitors.
2. Products are the same: Your product has little differentiation from competitors or is exactly the same.
3. Clear competitor benchmarks: Competitor prices are easily accessible, for example visible on their websites, making it simple to base your pricing decisions on existing market standards.
4. Price sensitive customers: Your target customers prioritize affordability, compare prices and choose the lowest-priced option that meets their needs. They are not willing to pay any extra.
5. Focus on volume: Your goal is to achieve high sales volumes by remaining competitive on price, instead of focusing on high margins.
6. When value-based pricing is challenging: It’s difficult to quantify the value your product offers, making it practical to set prices based on competitor prices.

Instructions for setting competition-based prices

1. Identify key competitors: Identify your main competitors that offer similar products or services. Focus specifically on those that target the same market as your business.
2. Gather competitor pricing data: Research the prices your competitors charge for similar offerings. Include regular prices, discounts, bundles, and promotional offers in your analysis.
3. Analyze competitor offerings: Compare the features, quality, and customer service of your competitors’ products or services. Determine how their offerings are perceived by customers relative to yours.
4. Position your product: Decide where your product stands in comparison to competitors. For example:
   • • Priced below competitors: Ideal if you're entering the market or aiming for cost-conscious customers.
     • Priced the same: Works well if your product is comparable in value to competitors.
     • Priced above competitors: Suitable for premium products or if your offering has unique features or superior quality.
5. Assess market dynamics: Consider market demand, customer price sensitivity, and current trends. Evaluate if competitors frequently adjust prices based on seasonal or promotional campaigns. Remember to adjust likewise!
6. Incorporate psychological pricing: Use techniques like setting prices just below competitors.
7. Adjust for perceived value: If your product has unique advantages or brand strength, set a price higher than competitors and emphasize these differentiators.
8. Test and evaluate: Experiment with slight variations in pricing relative to competitors to find what resonates with customers. Use sales data and customer feedback to assess whether your prices are competitive and appealing.

And most important! Remember to monitor competitor changes. Regularly check competitors’ prices to ensure your strategy remains competitive. Be prepared to adjust your pricing or even strategy.