What Is Competitive Pricing Strategy: Meaning, Examples, and Benefits

In a competitive business environment, adjusting your pricing strategy—whether you’re a new business or an established company—starts with observing competitors.

Analyzing data and understanding your competitors’ price points help you set competitive rates, attract more customers, and boost sales.

In the following sections, we take a deep dive into competition-based pricing – an approach that aims to attract customers and maintain market relevance by taking into account others’ prices. 

Understanding Competitive Pricing: Definition

Competitive pricing is a strategy used in both online and offline markets to set prices based on competitor analysis. This approach helps businesses align their pricing with market trends.

Unlike other pricing methods that consider production costs and profit margins, competitive pricing relies solely on competitors’ pricing strategies to determine rates. When using competitive pricing, you don’t have to copy rivals’ prices. You can choose one of three approaches: pricing below, above, or matching the competition.

We’ll look into these options in more detail below when exploring the different types of competitive pricing.

Key Features

To understand competitive pricing better, it’s key to familiarise yourself with the key features that shape this pricing strategy. 

First, competitive pricing is entirely market-based. Prices are determined by assessing the prices set by both direct competitors and indirect competitors. 

Second, this pricing approach is customer-centric. Its objective is to align with customer expectations for fair pricing compared to other pricing alternatives.

Finally, competitive pricing is dynamic. Instead of keeping prices the same at all times, companies make regular adjustments to reflect changes in the competitive landscape. 

Types of Competitive Pricing Strategies

You can choose to price match, set lower prices, or set higher prices.

Price matching 

Price matching or equal prices is a competitive pricing strategy where you offer the same price as the prevailing market price of your competitors in your niche to avoid losing customers. In most cases, businesses that adopt this approach seek to stand out from the crowd with a unique shopping experience or interesting product materials. 

For example, they could be using alternative manufacturing processes or relying on sustainable products for product creation. 

Lower price strategy

The second type of competitive pricing is the lower price strategy – selling your goods or services for a lower price than competitors, after you compare prices. 

For example, imagine that company A sells a specific model of running shoes for £200. A direct competitor, company B, sells a similar model of running shoes but for £180. As a result, company B is able to attract price-sensitive consumers and potentially grow its market share. 

The lower price strategy is especially appealing to companies that have the ability to capitalise on economies of scale. They’re very popular with new market entrants, who often rely on a loss leader strategy. In this case, the price doesn’t guarantee profitability but does quickly boost the customer base. 

Higher price strategy

The third and final competitive pricing technique is the higher price strategy.

As the name suggests, this approach is all about charging more than other businesses in your space to emphasise quality, exclusivity, or added value. Again, this technique is entirely based on competitor research and is suitable for businesses offering products with more advanced features or capabilities than rivals.

Usually, a higher price strategy approach is popular for experienced businesses with a stable brand reputation. 

When adopting a higher price strategy, businesses can also choose to implement price skimming to maximise profits. With price skimming, product prices are initially set to the highest amount that consumers are willing to pay when demand for the product or service is high. After the initial launch, the prices are reduced gradually over time.

Benefits of Competitive Pricing

Competitor-based pricing is, without a doubt, a great way to quickly intrigue your target market and stay ahead of others in your industry or niche.

Given the vast range of competitive pricing advantages, it’s no surprise that this pricing strategy is so popular today. 

Attracts Customers

If you’re looking for ways to attract new customers and build on your existing base, a competitive pricing strategy can turn out to be extremely effective. 

This approach helps you align prices with market expectations, naturally making your products and services more appealing to your audience. As a result, you can expect to intrigue more customers in no time. 

Not to mention that methods like price matching guarantee that customers receive fair pricing, which can dramatically improve brand loyalty and customer satisfaction.

Increases Profit Margins

Although competitive pricing can sometimes lead to narrow profit margins, this doesn’t always have to be the case.

In cases where a company’s goods or services cost less than competitors, there’s a possibility for price increases without sacrificing your competitive edge. This could significantly improve profit margins, especially if you can offer more value than your competitors.

Supports Market Entry

One of the biggest advantages of competitive pricing is that it works as a strong market entry strategy. By setting prices that match or beat competitors, new businesses can grab attention, attract early customers, and start building trust. Instead of relying only on expensive marketing, they can use pricing as a tool to get noticed and grow.

For new businesses, this approach helps bring in customers who are already familiar with similar products. It also provides a chance to test the market and find the right balance between profit and growth.

Enhances Market Relevance

Today, falling in the shadow of your competitors is easier than ever, given the dynamic and aggressive business landscape.

No matter what industry you’re in, competitive pricing can ensure that your rates remain competitive in ever-changing markets. This empowers businesses to stay relevant, trending, and attractive to consumers. 

Encourages Efficiency

Last but not least, competitive pricing makes companies more efficient than ever.

This pricing strategy forces businesses to optimise costs and operations to maintain profitability at competitive price points. This can sometimes lead to making positive improvements in areas that would have otherwise remained invisible or underestimated. 

Risks and Challenges of Competitive Pricing

Despite the vast range of benefits this pricing technique offers, there are also a few disadvantages of competitive pricing that it’s worth looking into.

Reduced Profit Margins

As noted above, selling products and services below the average price in the market can sometimes mean thinner profit margins.

Undercutting competitors may result in lower profits, especially if costs are not controlled.

To avoid this negative scenario, companies can balance competitive pricing with cost-efficiency measures that will prevent eating away profit margins.

Price Wars

Just like with other pricing strategies, competitive pricing creates room for price wars, which can have a detrimental effect on the bottom line of all competing businesses.

Competitors may lower prices in response, triggering a cycle that erodes margins.

One way to avoid this obstacle is to make sure you differentiate your offering via quality, service, or unique and unmatched features. This will position you as a leader in the market, regardless of price.

Ignoring Brand Value

Another potential challenge that can arise from competitive pricing is neglecting the power of brand value.

Solely focusing on competitor prices may overlook perceived value or brand loyalty. This can create worrying assumptions about your reputation and can make increasing prices in the future merely impossible. 

Luckily, you can prevent this from happening by using pricing as part of a broader strategy that reflects brand positioning.

Dependence on Competitor Actions

The last but not least important disadvantage of competitive pricing is that it’s heavily reliant on competitors.

Businesses relying on competitor pricing risk reactive decision-making instead of proactive strategy. This can put you in a disadvantageous position in the long term, exposing your vulnerabilities as a company.

Examples of Competitive Pricing

The truth is that competitive pricing is not just a theoretic strategy – it’s an approach that’s widely used across industries. 

Here are a few competitive pricing examples from real life:

• Retail industry – well-established retail brands are actively using price-matching techniques. By matching rivals’ advertised prices, brands can retain customers and stay competitive in an aggressive niche.
• Technology sector – another real-life example of competitive pricing can be seen in the technology space, where eCommerce platforms like Amazon rely on algorithms to adjust prices in real time based on competitors’ data.
• Hospitality industry – in hospitality, hotels align their rates across different online travel agencies like Booking to remain competitive in searches.

These are just a few examples of how companies around the world are using competitive pricing to win over customers. You can use some of these examples to adapt this strategy to set your own pricing.

How To Implement Competitive Pricing

The first thing that’s essential to do is to make sure you understand everything about the competitors in your market segment. Find out what products your rivals offer, how much competitors charge, and gather data on their customer base and market positioning. 

Create a competitive pricing analysis to examine the prices and how they match against yours. 

Next, analyse market conditions and evaluate things like customer demand, economic trends, seasonality, and other factors that affect pricing. 

Once you’ve gathered all of this information, you’ll need to define your pricing goals. Determine whether the focus is on market share, profitability, or brand positioning.

It’s extremely useful to rely on competitive pricing intelligence, which will help you monitor the prices of competitor goods and services. This, in turn, will empower you to make data-driven decisions related to not only pricing but product development and marketing. As a result, you can stay competitive and attractive in your niche.  To conduct competitive pricing intelligence, you can rely on diverse methods, like online research, price comparisons, customer surveys, and more. 

You’re now ready to set your prices strategically. When making your choice, ensure that you’re balancing competitiveness with profitability. 

Finally, make sure you continuously monitor competitor prices and adjust rates where necessary.  

Is Competitive Pricing Right for Your Business?

Now that you’re aware of all that competitive pricing can offer, you’re probably asking yourself whether this pricing strategy is right for your business.

This pricing method is most frequently adopted by businesses in highly competitive markets, where price is a primary customer consideration. It’s also popular if you’re targeting price-sensitive consumers, especially in spaces like eCommerce, retail, and travel.

Last but not least, competitive pricing is proven to be extremely effective for new market entrants or companies looking for quick growth. 

If you choose to explore this pricing method for your business, ensure that costs are properly managed to guarantee profitability. 

Conclusion

Overall, basing your pricing decisions on the competitive pricing model can be a powerful way to stay relevant and attract new customers in a crowded market. 

However, before making any pricing decisions, make sure that this strategy is suitable for your business, depending on your objectives and costs. Don’t forget to rely on sophisticated competitor research tools to gather as much relevant information for data-driven choices. 

Frequently Asked Questions

What’s the difference between competitive pricing and penetration pricing?

Competitive pricing involves setting prices at a similar price to competitors, focusing on market positioning rather than aggressive price reductions. Penetration pricing, on the other hand, starts with a lower-than-market price to attract customers quickly and gain market share before gradually increasing prices.

Is competitive pricing suitable for SaaS companies?

Yes, competitive pricing works well for SaaS companies, especially in crowded markets where customers compare options based on features and value. Setting a similar price to competitors while offering unique benefits can be the answer to attracting and retaining customers.

What are some popular mistakes to avoid when implementing competitive pricing?

One common mistake is failing to gain a comprehensive understanding of the market, leading to incorrect pricing decisions. Other mistakes include ignoring costs, overlooking brand differentiation, and competing solely on price instead of value, which can lead to reduced profitability.