Competitive Pricing, what is it?
The strategy of competitive pricing is the price selection based on the market and the competition. It is a technique that companies that sell a similar product often use. Although in many cases, the products have very similar characteristics, the price varies from one company to another. This strategy is used when a product typology is already balanced in the market, has a history and there are many substitute products.
Defining your competitors
First, the most important thing is to define who the competition is. To that end, anyone who our potential customers consider substitutes for what we sell will be considered a competitor. Perhaps your competitor does not sell the same product but does provide an alternative solution to the client’s needs.
For example, if a client needs to travel from one city to another, it will be understood as a competitor to any company that provides a service that will transport him or her there. Traveling by train, plane, bus, rental car, etc. would come into play here. Not all of them sell the same service but they are substitutes since they solve the same problem.
Types of prices
When establishing the price of a product, the company can opt for a higher price, equal to or less than the price of the competition. The fact that similar products already exist in the market helps to know what price the market is used to and willing to pay.
Higher price than the competition
When selling a product above the market price, the consumer automatically thinks that the product must be of higher quality since we associate the price with quality. If you decide to establish a higher price, the product will have to offer some other advantage. For example, you may offer more flexible payment methods, superior quality, innovative products, brand values, etc. Marketing strategies are a good way to differentiate your product from your competitors.
Price below market
Establishing a price below market is what we call a loss leader strategy. These products are not profitable but serve as a hook to attract new customers or to sell additional products or services.
Price war
On many occasions, a price war is generated between competing companies. Both may think that encompassing the largest market share implies obtaining greater benefits. However, this is not always the case.
Usually, the objectives of price wars are:
- winning market share
- entering into the distribution channel before its competitors
- getting rid of some potentially dangerous competitor
To win a price war, you have to keep in mind that:
- keeping the surprise effect to shock the market
- taking an offensive attitude and taking the lead
- having the flexibility to face possible changes
Setting a price below Market is very common in new store openings. It is also common for new products that want to carve out a place in the market. For this, the product has to be sold almost without benefit but you will practically keep customers away from the competition. You can recover losses with other products with the benefit that customers might purchase.
A very common practice is placing these loss leader products at the end of the physical stores. This way, customers have to go through many other products at a regular price before reaching the hook product.
It also happens with dependent products that are sold without benefit but with paired consumables that do have a benefit. For example, razors or some game consoles are.
Another form of loss leader pricing would be introductory prices. Many companies offer a service at very low prices for a certain period for later, increasing the price.
This practice is forbidden in many States of the US and part of Europe because it is an unfair practice since large companies can afford this practice but not small ones. It is also forbidden to promote some loss leader products since manufacturers can establish a minimum sale price.
Similar price to the competition
One way not risky would be by using the same prices as the competition. By setting a similar price we ensure that consumers will find our offer at market price and we will have the opportunity to be purchased. It should be said that the quality of our product must be at least similar to not fail.
Advantages and disadvantages of competitive pricing
There are many other strategies to establish the price of a product such as premium prices, low cost, etc. The sector and its characteristics can determine which is the best strategy.
Advantages
The competitive pricing strategy can be a good option when the product is already balanced in the market and there are quite a few companies that sell it.
- Strategy mix: relying on a competitive pricing strategy coupled with some other pricing strategy will make the established pricing more efficient.
- Stable clientele: having a similar competition price ensures a stable flow of customers.
- Price competition: by establishing pricing similar to other competitors, the price war issue doesn’t exist.
Disadvantages
- Disadvantages of Small Business: small companies need to be careful if they try to compete with larger companies. A competitive pricing strategy that does not cover manufacturing costs could sink the small ones.
- Failure chance: when establishing the price based on calculations and investigation of other companies, these may be mistaken, and therefore the chances of failure increase.
- Difficulty attracting customers: the price will not be an attractive factor for consumers as it will be practically the same for all similar products. Therefore, our product will have to have other additional advantages to attract them.
Available tools
Nowadays, keeping track of competitive prices manually would be an arduous task, so using specialized software for this tracking will save a lot of time and resources.
Thanks to these intelligent programs you can have a more global view of the market as well as the actual position of your product. It is an essential tool because it optimizes the profit margin in busy markets.
The software constantly tracks and collects prices by offering real-time information. You could even establish A / B test strategies to maximize margins in specific sales periods. In turn, having collected information over time, history can be created to interpret the trends of its competitors. For example, when competitors started with price campaigns for Christmas, Valentine, etc.
Here you can find a summary of the best software for price optimization.
Conclusion
Competitive pricing minimizes risks but it also reduces the chances of profit. However, if we consider that our product has qualities and advantages that the competition does not have, you may increase the sale price.
Discover more articles that will help you boost your business sales here.
