What Is A Competitive Based Pricing Strategy

Pricing is one of the most important decisions that a business can make. It affects not only the profitability, but also the perception, positioning, and demand of a product or service. However, pricing is also one of the most challenging decisions, as there are many factors to consider, such as costs, competitors, customers, and market conditions.

One of the most common and effective pricing strategies is competitive based pricing. Competitive based pricing is a pricing strategy in which a company sets the price for its products or services by considering the prices of competing products in the market, with the goal of attracting consumers by offering competitive or better value.

In this article, we will explain what competitive based pricing is, how it works, what are its benefits and challenges, and how to implement it in your business.

What is Competitive Based Pricing?

Competitive based pricing is also known as market-oriented pricing or competition-oriented pricing. It’s a pricing method where a company sets the price for its products or services by observing and analyzing the prices of similar products or services offered by competitors in the market. The company then decides whether to match, undercut, or exceed the competitor prices, depending on its objectives and positioning.

Competitive based pricing is customer-focused, meaning that it bases the price on how much the customer is willing to pay for a product or service in relation to the alternatives available in the market. This requires a deep understanding of the customer’s needs, preferences, motivations, and price sensitivity. It also requires a clear differentiation of the product or service from the competitors’ offerings.

Competitive based pricing is different from cost-based pricing and value-based pricing. Cost-based pricing sets the price based on the cost of production plus a desired profit margin. Value-based pricing sets the price based on the perceived value of a product or service to the customer. Both of these strategies ignore the prices of competitors and may result in underpricing or overpricing.

Competitive Based Pricing Basis

Competitive based pricing works by following these steps:

1.
Identify your target segment. You need to define who your ideal customers are and what are their characteristics, needs, preferences, and price sensitivity. You can use market research, surveys, interviews, focus groups, and other methods to gather this information.
2.
Identify your main competitors. You need to determine who are your direct and indirect competitors in the market and what are their products or services, features, benefits, prices, and value propositions. You can use online tools, websites, reviews, social media, mystery shopping, and other methods to collect this information.
3.
Analyze your competitive position. You need to compare your product or service with your competitors’ products or services and identify your strengths and weaknesses. You need to evaluate how your product or service differs from your competitors’ offerings in terms of quality, functionality, design, brand image, customer service, etc.
4.
Set your competitive price. You need to decide whether to match, undercut, or exceed your competitor prices based on your competitive position and your objectives. You can use online calculators or formulas to find your optimal price point.

What are some Examples of Businesses that use Competitive Based Pricing?
Competitive based pricing is often used by businesses that sell products or services that are common in the market or that have low differentiation from competitors. In these cases, customers are accustomed to paying standard market prices and are not very sensitive to value or quality differences. Some examples of businesses that use competitive based pricing are:

• Cellular networks: Cellular networks such as AT&T , Verizon , T-Mobile , etc. often use competitive based pricing to set prices for their plans and serviceshttps://pros.com/learn/b2b-blog/competitive-pricing-strategy. They monitor and match each other’s prices and offer similar features and benefits to attract customers who are looking for reliable and affordable cellular services.

• Auto-dealers: Auto-dealers such as Ford , Toyota , Honda , etc. often use competitive based pricing to set prices for their cars and truckshttps://www.investopedia.com/terms/c/competitive-pricing.asp. They compare and adjust their prices according to their competitors’ prices and offer similar features and benefits to attract customers who are looking for quality and value vehicles.

• Banking and financial services: Banking and financial services such as Chase , Bank of America , Wells Fargo , etc. often use competitive based pricing to set prices for their products and serviceshttps://blog.hubspot.com/sales/competition-based-pricing. They observe and match each other’s prices and offer similar features and benefits to attract customers who are looking for convenient and secure banking and financial solutions.

• Retail stores: Retail stores such as clothing, grocery, hardware, and department stores often use competitive based pricing to set prices for their productshttps://priceway.io/blog/competition-based-pricing/. They add a markup percentage to their wholesale or purchase costs to cover their overheads and earn a profit. The markup percentage may vary depending on the type of product, its demand, its seasonality, etc.

Benefits and Challenges of Competitive Based Pricing

Competitive based pricing has many benefits for both businesses and customers. Some of these benefits are:

• It increases sales volume by attracting more customers who are looking for the best deal in the market.

• It enhances customer satisfaction by delivering fair and reasonable prices that match their expectations and preferences.

• It strengthens customer loyalty by building trust and credibility with customers who perceive the business as honest and transparent.

• It supports market penetration by enabling the business to enter new markets or segments where competition is high or prices are low.

However, competitive based pricing also has some challenges that need to be overcome. Some of these challenges are:

• It reduces profitability by lowering the profit margin per unit sold or by increasing the costs of production or marketing.

• It limits innovation and differentiation by focusing on price rather than on value creation or quality improvement.

• It creates price wars by provoking aggressive reactions from competitors who may lower their prices further or offer discounts or promotions.

• It may face legal issues by violating antitrust laws or regulations that prohibit predatory pricing or price fixing.

How to Implement Competitive Based Pricing in Your Business?
To implement competitive based pricing in your business, you need to follow these steps:

1.
Define your objectives and positioning. You need to determine what you want to achieve with your pricing strategy and how you want to position your product or service in the market. You need to consider your target market, your value proposition, your competitive advantage, and your desired image and reputation.
2.
Monitor and analyze your competitors’ prices. You need to track and evaluate the prices of your competitors’ products or services on a regular basis. You need to use reliable sources of information, such as online tools, websites, reviews, social media, mystery shopping, etc. You need to identify the factors that influence their pricing decisions, such as costs, demand, supply, value, etc.
3.
Set and adjust your prices. You need to set your prices by matching, undercutting, or exceeding your competitor prices based on your objectives and positioning. You need to use online calculators or formulas to find your optimal price point. You need to adjust your prices according to changes in competitor prices, customer behavior, market conditions, or costs.

Competitive based pricing is a pricing strategy in which a company sets the price for its products or services by considering the prices of competing products in the market. Competitive based pricing can help businesses increase their sales volume, customer satisfaction, customer loyalty, and market penetration. However, competitive based pricing also has some drawbacks, such as reducing profitability, limiting innovation and differentiation, creating price wars, and facing legal issues.

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