Competitive Pricing Definition
Working in sales, marketing and business teams requires skilled individuals to develop methods to maintain or expand product sales margins. Businesses use competitive pricing to increase sales of products that are similar to those of their competitors.
By researching more about competitive pricing, useful strategies, and pricing options, you can increase your credentials at work and impress employers during interview sessions.
In this article we define what competitive pricing is and who should use it, review competitive pricing options and tips for competitive pricing strategies as well as highlight the advantages and disadvantages of competitive pricing.
Contents
What is competitive pricing?
Competitive pricing is a type of pricing strategy in which businesses set a market price for their product that is the same as the market price for a similar competitor’s product.
An example would be if an electronics company priced their new tablet at Rp. 300,000 instead of Rp. 400,000 because their main competitor was selling their tablet for Rp. 300,000. Similarly, electronics companies may decide to sell their tablet for IDR 350,000 instead of IDR 400,000 if it has more features than their competitors.
The purpose of using competitive pricing is to maintain profit margins when several businesses sell the same type of product or service.
Who needs competitive pricing knowledge?
There are a variety of jobs and individuals that require expertise to understand competitive pricing and develop competitive pricing strategies.
Here are some examples of job positions that involve competitive pricing:
1. Price analyst
The main job of a price analyst is to conduct research and help businesses develop competitive prices. They consider what type of competitive pricing will work best for the business while also determining what pricing will give them the best competitive advantage.
2. Product engineer
These professionals design the product and determine the materials, production time, and labor required to manufacture the product. Because of their role, they provide insight into the market price range for selling a product.
3. Manufacturing specialist
Manufacturing specialists determine the production process for a particular product and how to mass-produce it. They help develop the relative production costs that affect market prices.
4. Market research analyst
This marketing professional completes research on a company’s competitors, consumer demographics, and industry trends to assist marketing efforts. They also coordinate with the marketing and sales teams to provide updates on new competitors’ products and market prices.
5. Accounting manager
The accounting manager manages the department’s employees and oversees all costs associated with business operations. Because they understand how much it costs to run a business, they can offer insight into product pricing.
Various ways to set competitive pricing
Exact competitor pricing options may differ for each business depending on the popularity of their brand, product offering, or scale of operations. Here are three competitive pricing options and an explanation of why a company would choose one over the other:
1. Setting prices below competitors’ prices
A businessperson usually chooses a market price below that of their competitors for one or more factors. They may decide to use a lower market price because they know they have a lower quality product to offer.
However, they may also charge a lower market price if they do not see an increase in sales after aligning their market price with their competitors.
2. Setting the price the same as the competitor’s price
When a business charges their product at the same amount as their competitors, they aim to increase sales and match themselves with their industry competition.
Businesses also set the same market price to determine if their pricing has been too high in the past, or if they need to identify other areas that are impacting sales. This could include marketing efforts, customer service, product quality or product design.
3. Setting prices above competitors’ prices
A business charges a market price for their product above a competitive price when they believe their product is of high quality for which consumers will pay more.
They also raise market prices when they know that their product is more widely available than their competitors and they have a stronger customer base.
Tips for creating a competitive pricing strategy
When determining a competitive pricing strategy, business owners and sales professionals need to consider whether it is the right choice for their business. Review these competitive pricing tips:
Cost of production is a major factor in the market price that businesses can use to sell their products, while still making a profit.
Therefore, businesses first need to find out if they can maintain product quality while lowering manufacturing costs to a level where they can sell the product with or below their competitors.
2. Assess the target customer’s needs first
Sometimes consumers do not care about the price and even more concerned with the quality of the product or the use of well-known brands. That’s why it’s important for businesses to consider what factors make customers repurchase and whether competitive pricing is necessary.
3. Research competitors’ pricing options for similar products
When considering competitive pricing options, businesses should review the market prices of other industry competitors outside of their main competitors. This allows them to visualize the price range for the same product and whether other businesses are trying to match the prices of top competitors.
4. Know when to use a different pricing strategy
Competitive pricing is not always the pricing strategy a business needs to get better profit margins.
For this reason, businesses must determine whether another pricing strategy would be more profitable for their needs to maintain product quality and customer satisfaction.
Advantages of using a competitive pricing strategy
There are several advantages to competitive pricing. The following are some examples of how competitive pricing can benefit a business:
- Maintaining a customer base despite competing offerings: When a business already has a strong customer base, engaging in competitive pricing can help protect their loyal customers when competing businesses sell the same product at a lower price.
- Equalizing businesses with their market competition: For businesses that are trying to achieve the same amount of brand and customer recognition as their competitors, competitive pricing allows them to convert customers from competitors’ products into their own.
- Provide opportunities to increase revenue: If the business has not seen success with similar products, lowering the market price can help increase sales and provide higher profit margins.
Disadvantages of using a competitive pricing strategy
There are several potential downsides to this competitive pricing that will affect your decision making in your sales or marketing work:
- High risk for small businesses: Small businesses may be at high risk if they engage in competitive pricing. This is because they need to meet their profit margins to maintain operations and by reducing product prices.
- Less quality products due to lower production costs: In lowering market prices to compete with competitors’ prices, businesses may have to reduce production standards and the materials they use to make products. This can lead to customer dissatisfaction and can mean the loss of valuable customer support.
- Loss of revenue: Businesses also have the potential to lose revenue by lowering the prices of their products to match those of their competitors, especially if they don’t see increased sales and lowering their production costs.
Another important thing you should know about competitive pricing
Here are the following frequently asked questions and answers about competitive pricing to maximize your knowledge on the topic:
1. What is the difference between competitive pricing and penetration pricing?
The difference between competitive pricing and penetration pricing is the strategic use and circumstances for using it. For example, competitive pricing is a process by which businesses attempt to adjust the prices of their products to match those of their competitors.
The main goal of businesses that use competitive pricing is to increase their customer base and leverage themselves against the competition in their industry.
In contrast, penetration pricing is the process by which a business introduces a new product or service offered by several competitors and sets a market price well below the average. The main purpose of penetration pricing is to set a price so low that competitors will not try to enter that market.
2. What is a competitive price analysis?
Competitive pricing analysis is a research method that businesses use to assess consumer feedback on their competitors’ previous competitive pricing activities.
This helps businesses gauge the potential response to an increase or decrease in product prices and whether it will affect consumer spending habits. Competitor pricing analysis focuses specifically on consumer reactions rather than how competitive pricing will affect their profits and business operations.
How often do businesses change their competitive prices?
The time frame for businesses to change their prices depends on business needs and financial factors. However, most businesses make adjustments to their prices annually based on surplus inventory, market changes or profit margins.