What Is Competitive Pricing? A Comprehensive Guide

No comments
August 26, 2024

What’s in a pricing strategy? Sales, market share and customer perception, for starters. In today’s world, where price matching is just a few clicks away and pricing software has become a need not a want, a competitive pricing strategy is key to entering a saturated market successfully. But what exactly does that entail?

Compare Top CPQ Software Leaders

Competitive Pricing Guide

In this article, we’ll delve into the world of competitive pricing, exploring its types, benefits, pros and cons and best practices to help you get ahead of the game. Whether you’re an old hand at business or just starting, understanding how to price using your competition as a benchmark can add some useful perspective.

Article Roadmap

What Is Competitive Pricing?

Competitive pricing is a strategy where businesses set prices using competitor prices as a benchmark. It’s usually most effective when there’s already an established market leader and products and services sold are the same or similar.

Say, you want to buy a packet of chips. You go into the store and head to the right aisle. Most, if not all, the options are priced similarly. Ruffles won’t be double the price of Lays and vice versa. Even though both brands have “unique” ridges, the product is similar enough to price on par with each other or risk losing sales.

Types

Unlike a scarf or a wristwatch, a competitive pricing strategy isn’t one-size-fits-all. Here are the three strategies you can pick from to price your products:

Penetration Pricing: Think of penetration pricing as offering lower prices than competitors for a steal deal. Initially, you’ll undercut an already established competitor to boost sales and market share. It may not be profitable or sustainable long term, but it can work as a loss leader strategy.

Price Skimming: You’re aiming for the cream of the crop with a price skimming strategy. You’re relying on your brand reputation or product superiority to capture market share by pricing your goods and services higher than your competitors.

Price Matching: This type of pricing strategy is pretty self-explanatory. You price your products on par with competitors. This is a classic example of “if you can’t beat ’em, join ’em.” You can respond to competitors’ strategies without frequently updating price engines or e-commerce stores. For example, retailers like Walmart, Target and Best Buy have price-matching policies.

Primary Benefits

Changing up your pricing strategy can feel like switching your team line-up before a championship game. It’s not all risky business, though. We’ve drawn up the benefits of a competitive pricing strategy below.

Competitive Pricing Benefits

Increase Sales and Market Share

Cornering the market is easier said than done. But, by adopting loss leader and price matching strategies, you can convince new users to try your product. It can flip the switch on comparison shopping, making it a friend versus a foe.

Minimize Risk

Stand on the shoulders of your competitors, figuratively, by basing your strategy on their knowns rather than branching out into the unknown. Well-established markets mean more data and reporting to analyze. You can review your prices relative to competitors and determine where you stand.

Enhance Flexibility

Instead of sticking to a set price, you can adapt using your competitors’ prices as a benchmark. Offering price-matching policies means minimizing time spent changing prices and customers leaving for greener pastures.

Improve Brand Awareness

Entering a well-established market is by no means an easy task. Cash in on the goodwill of pre-established competitors by using familiar price points or lower prices to hook customers.

Compare Top CPQ Software Leaders

Challenges

Unfortunately, pricing strategies don’t exist in a vacuum. There are plenty of moving parts and intangibles to manage with competitive pricing, and it may not be a perfect fit for everyone. Here are some challenges to keep in mind before you switch your strategy.

Perceived Brand Image

Setting lower prices than your competitors can affect your brand negatively. It can lead to adverse connotations about product quality and may not build customer loyalty. You need to tread carefully to avoid being seen as a “discount brand.”

Price Wars

Competitive pricing can lead to a race to the bottom. Trying to aggressively undercut your competition’s prices can escalate to a tit-for-tat that harms margins and devalues your product.

Lower Margins

All products and services are not produced in the same way. Following your competition’s lead on pricing may harm your margins if your supply chain works differently or you can’t tap into economies of scale.

Best Practices

Once you decide you want to go down the competitive pricing route, you need to get down to brass tacks. It’s important to have a framework to cover any blind spots. Here are some pointers to keep in mind.

Competitive Pricing Best Practices

Understand Your Product

First things first, you need to understand the minutiae of your product. Take time to outline your key features, target audience, costs and margins. These details will help you match your needs with the right type of competitive pricing. Conducting market research may help with your comparative analysis in the next section.

Perform Product Comparisons

Next, you’ll want to look at the competition and see how you stack up. Create a table or graph of prices and features for a bird’s eye view. Research your competitor’s target market and audience and check for information on price variations, during sales or for initial purchases.

Test and Modify Prices

It’s unlikely you’ll hit the jackpot on the first price you select. Competitive pricing requires a bit of trial and error. Use A/B testing to decide what prices work for your product. Perhaps you’ll find customers are willing to pay a few dollars more or would make the switch for a $5 cut.

Evaluate Consumer Preferences

Even the best-laid plans can be upended by consumer behavior (cc: the Twitter Blue fiasco). Some consumers are willing to pay more for products that align with their ideals and image, even disregarding lower-priced comparable products. In contrast, other consumers are more price sensitive based on income levels. Stay up-to-date on preferences by conducting pricing research routinely.

Focus on Your USP

What makes your product stand out? How are you different from the competition? Do you use environmentally friendly processes? Or does your product have underlying benefits? Pinpoint your unique selling point and find the crossover with your customers’ preferences to price your product.

Invest in Software

Pricing involves numerous, unpredictable variables. While there is no “easy way out,” CPQ software can simplify pricing with automation, pricing rules and a pricing engine. Define your pricing rules to price match without manually changing prices and set upper and lower limits for discounts.

It also integrates with CRM software to streamline your marketing pipeline and save time.

Compare Top CPQ Software Leaders

Next Steps

Implementing a successful competitive pricing strategy can feel like threading a needle in a sailboat. It may be daunting, but finding the right CPQ software to meet your needs can be a game changer. Use our free requirements template to find the right product to level up your pricing game.

What’s one way competitive pricing benefits your business? Let us know in the comments below!

Christina GeorgeWhat Is Competitive Pricing? A Comprehensive Guide

Leave a Reply

Your email address will not be published. Required fields are marked *