Competitive Pricing: Types, Pros and Cons
In dynamic e-commerce marketplaces, where prices fluctuate, pricing products to beat the competition is quite challenging. A competitive pricing strategy becomes successful when it translates into something more than undercutting competitors’ pricing. Shoppers are always looking to make the most of deals. Those brands that continuously monitor pricing have the upper hand in winning sales. Price monitoring software helps e-commerce businesses apply data-driven pricing.
What is Competitive Pricing?
When businesses adjust the prices of their products based on their competitors’ prices, it is called competitive pricing. It is also referred to as competitor-based or competition-based pricing. Competitor-based pricing aims to attract more customers and increase market share. For effective competitive pricing, businesses need to observe changes in their competitors’ pricing and consumers’ perceived value of the product.
Is Competitive Pricing Strategy a Good Fit for Your Brand?
Though price-conscious customers expect competitive prices, several factors must be considered before using a competitive pricing strategy for your product. Brands should research the prices charged by other brands selling similar products. It is important to consider the production cost, overhead, shipping charge, and the required margin when setting prices. You must also know the customer demand for the product and the price buyers are willing to pay.
If your product has a unique feature, a competition-based pricing strategy can be reserved for the later phase in the product lifecycle when more competitors join the category. Relying on a single strategy, like competitive pricing, might not always be the best idea. In a product lifecycle, most successful brands use a combination of pricing strategies for e-commerce, such as promotional pricing, bundle pricing, and dynamic pricing.
Types of Competition-Based Pricing Strategies
Brands execute competitive pricing strategy in three different ways: set the price below the competition, at par with the competition, or above the competition. The end goal is the same: to gain an edge over competitors and drive profitability.
Loss Leader Strategy
When brands seek an easy method to increase traffic or market share quickly, they rely on offering steep discounts. This becomes a loss leader strategy when a company sells one of its products at a loss and the complementary product at a high margin. An example of a loss leader strategy is Gillette. As part of its introductory offer, Gillette sold mechanical razors at rock-bottom prices compared to its competitors to attract a more extensive customer base. Eventually, every razor requires a replacement blade after constant usage, so Gillette sold compatible blades for its razors at high prices to make up for the initial losses.
Price Matching Strategy
When a retailer or a brand is unable to anticipate competitors’ price changes, they may promise consumers to match the advertised competitor prices of certain me-too products. These products generally don’t have a distinct differentiating factor compared to their competitors. To prevent losing customers to Amazon purely because of low prices, Walmart and Best Buy have announced price-matching schemes in the past.
Price Skimming Strategy
In the price skimming strategy, brands with unique features charge higher prices at a time when they launch in the market. Slowly, when other brands introduce similar features, they reduce their prices to attract customers who have aspired to buy the product at the launch price. Most electronic products use a price skimming strategy.
Competitive Pricing Strategies Summary
| Strategy Type | Description | Common Use Case |
|---|---|---|
| Loss Leader | Selling a product at a loss while charging high margins on complementary items. | Quickly increasing traffic and market share (e.g., Gillette razors). |
| Price Matching | Promising to match the advertised prices of competitors for similar products. | Preventing customer loss to low-cost retailers (e.g., Walmart, Best Buy). |
| Price Skimming | Charging high initial prices and lowering them as competition increases. | Electronic products and items with unique features. |
Importance of Competitive Price Analysis
Competitive price analysis is all about understanding how your competitors price their products and services—and how those choices stack up in the marketplace. It involves looking at the big picture: direct and indirect competitors, product availability, promotional strategies, and even seasonal trends that influence buying decisions. Done right, it gives businesses the insights needed to refine pricing strategies and stay ahead of the competition.
Key elements of a strong competitive price analysis include:
- Data collection: Tracking details like competitor pricing, promotions, and inventory levels.
- Market position monitoring: Understanding how pricing shifts influence customer behavior and market dynamics.
