What Is a Competitive Price? Understanding Pricing Strategy

Updated August 22, 2023

Companies use various strategies when pricing their products for consumers in the marketplace. One such approach is to price products competitively with other vendors. Learning how companies select their product pricing can help you better understand the elements involved in making a sound decision. In this article, we discuss the definition of a competitive price, identify the three strategies of pricing products, uncover the advantages and disadvantages of this pricing strategy, and offer various tips for pricing your products.

What is a competitive price?

A competitive price is a pricing strategy used by businesses to establish a market value for their products similar to their competitors' offerings. A company reviews competitors in the market with similar products and selects a price that is competitive to encourage consumers to purchase their item. For example, a television manufacturer identifies their primary competitor selling a new television for $500.

As a result, the manufacturer prices their recent set at $450. Companies typically use competitive pricing for the marketing of products instead of services, since services can differ from business to business considerably. The goal of this pricing strategy is to maintain profit margins when various companies sell similar products.

Related: Competitive Market: Definition, Characteristics, and Purpose

Three pricing strategies

There are three pricing strategies a company can use when determining the best sell rate for their items. These include selling above competitor pricing, below the competition, or matching the market value:

Premium pricing

Premium pricing means that a company chooses to price its products above market value. For this strategy to be effective, the company relies on the quality of the item. Because the product doesn't compete on price, it creates an environment of exclusivity or prestige. Marketing and brand awareness provide value to the product through unique features, innovation, and product placement.

For example, if the company recognizes that its product is more widely available than a competitor's, it may price it at a premium value. Another example is a luxury product line that focuses on high quality and exclusivity. A premium pricing strategy can work effectively for the right product in the appropriate market.

Related: How to Use the Value-Based Pricing Model (With Benefits)

Loss leaders

Another strategy companies use is pricing a specific product well below their competition, also called loss leaders. A loss leader is an item that sells considerably lower and may even sell below the cost of the product. A company may choose this strategy because they identify their product is of lower quality than others in the market.

They may choose this strategy if they see no improvement in sales after aligning their pricing with the competition. Some companies use this method for one product to draw consumers into their location to purchase the item. While the customer is in the store, the company then markets additional products to the consumer, hoping to increase the total value of their purchase.

Price matching or competitive value

Finally, a company can choose to price its products at a similar value to its competitors. They can do this through price matching or using the established market value. Businesses may use similar pricing to increase sales volume and leverage themselves in the marketplace with the competition. An organization may select this strategy when they determine their prices are too high or identify another area that affects their sales. For example, they may research marketing efforts, product quality, item design, or customer service.

Related: 8 Types of Strategic Pricing for Products and Services

Advantages to pricing competitively

The primary advantage of pricing competitively in the market is it allows for total control over product positioning. When cost is no longer an advantage in the market, you can identify other factors that make the company's competitors appeal to consumers. For example, you can analyze their marketing strategy, product design and features, and brand story that sets their item apart from yours. This can provide valuable insight and information on how to improve your marketing and product positioning for increased brand awareness and sales. Other advantages to pricing your products competitively include:

  • maintaining the customer base regardless of other offerings in the marketplace by safeguarding loyal customers

  • converting competitor customers to your product by offering a similar product and price

  • improving sales on previously higher-priced items that failed to sell in the market

Related: What Is Strategic Management and Why Is It Important?

Disadvantages to pricing competitively

Competing with similar products based exclusively on price can work in the short-term, but may leave a business open to decreasing long-term success. To improve this, a company can continue providing quality and value to its customers. Here are several disadvantages to pricing competitively:

  • small businesses may experience higher risk as they try to meet profit margins to maintain daily operations, as reducing product pricing may also reduce profit margins

  • lowering prices can cause lower-quality products as a result of lowering manufacturing costs

  • lower quality products can cause an increase in customer dissatisfaction and a lack of confidence in the brand

  • the potential risk of loss of revenue even after matching competitor's pricing strategies

Tips for developing a pricing strategy

When developing a pricing strategy, business owners and sales professionals have various aspects to consider. Determining the right option for a business can be easier by reviewing these tips:

Know the customer

One of the essential elements to developing an effective pricing strategy is knowing the customer. By identifying your target market and understanding their needs, wants, and desires, you can ensure your pricing matches their values. For example, some customer groups are sensitive to price, whereas others are most interested in the product's qualities or features. Knowing who the customer and target audience is for individual products can help determine the best price for the market.

Related: Top 10 Skills of a Marketing Manager

Research competitors

When developing your pricing strategy, another helpful tip is to research your product competitors. Find other companies that offer a similar product and identify their pricing in the marketplace. Ensure you look at a wide range of competitors, not just your direct competition. This provides you with a more significant sampling of product pricing. In addition, it may be helpful to keep a document, spreadsheet, or database of competitors' pricing so that you have it readily available when discussing the market price for your product with others in the organization.

Related: Research Skills: Definition and Examples

Lower manufacturing costs

Another thing to consider when developing a pricing strategy is to lower your manufacturing costs before you drop your price. To ensure you make the most profit from your products, you can analyze your production costs and make adjustments where possible. The cost of manufacturing is a principal element in creating a pricing strategy. You want to determine if you can maintain product quality while minimizing production costs to a level where you can sell your items at the same price as the company's competitors.

Related: How to Calculate Variable Cost With Examples

Know when to change your strategy

If competitive pricing doesn't lead to better profit margins, analyzing your current approach against other options may better support the company's market strategy. For example, another method may better suit the brand's product quality, encouraging customer satisfaction and brand loyalty. In addition, knowing when to change your pricing approach can help maintain profits and increase revenue.

Related: Top Product Management Skills

FAQs about strategic pricing for competition

Here are several frequently asked questions about pricing products competitively that can help you better understand the topic:

What is a competitive pricing analysis?

Competitive pricing analysis is a research method used to evaluate customer feedback about prices in the market. A business asks consumers for their thoughts about a competitor's prices on a similar product. The company can use this information to gauge the potential response of increasing or decreasing product prices. Consumer feedback is also helpful in determining whether pricing influences customers' spending habits. This analysis focuses primarily on customer reaction without evaluating how pricing can affect profits or business operations.

How often do businesses change their pricing strategy?

There's no specific timeframe that businesses use to change their pricing strategy, as there are many factors to consider. For example, a company may change its pricing based on its business needs, financial influences, or market changes. Most businesses, however, review their pricing strategy annually to ensure that they remain competitive in the marketplace. Other factors that can affect pricing changes include surplus inventory, material cost fluctuations, and profit margins.

What is the difference between competitive and penetration pricing?

The differences between these two pricing strategies include the strategy's reason and the situation for use. In pricing products competitively, a business uses this method to adjust its pricing to align with competitors of a similar item.

The primary goal of this strategy is to increase the customer base, increase revenue, and leverage the brand against the competition. In contrast, penetration pricing is when a business introduces a new product to the market offered by a few competitors. They set the market price below average, which discourages other companies from entering the market. As a result, the company has minimal competition.

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