It is very essential to price your product effectively. If the products or services are not priced appropriately, it may lead to a disaster- simple because none of your customers would opt for them. If the prices are too high compared to your competitors operating in the same market segment, it may lead to customers opting for their products or services. If the prices are set too low just for the sake of increasing adoption among customers, it may cause your profits to erode, causing a serious impact on your business.
Competitive pricing, in simple words, is a strategy where you price your products or services according to the prices being offered by your competitors.
In this article, let us explore what is competitive pricing, the advantages of competitor pricing, the issues with competitive pricing and understand the same in-depth via some real-life examples.
What Is Competitive Pricing?
Competitive pricing is setting the prices of your products or services as par with prices offered by your competitors. The strategy is derived from the assumption that your competitors (especially the ones which are performing well and have market leadership) have priced the products and services appropriately and thus are benefitting from it.
There are several advantages of competitive pricing as well as some issues assigned to it. Let us understand them in detail below.
Advantages of Competitive Pricing
As discussed earlier, going by the definition of competitive pricing, a business or individual prices its products or services in accordance with pricing offered by its competitors. The price can be matched exactly to what is being offered by the competitors, which can be kept lower than the competitor’s price or can be made slightly higher than the competitor’s price if there is more value being provided to the customer. The exact strategy to be used will depend on the organization’s goal- increasing market share, getting more customers to try the product, increase profitability, etc.
1. Easy to follow a methodology
The methodology is very easy to follow since the competitor’s prices for the products or services can be easily found out. For example, if you are an FMCG company selling biscuits, you can easily find out the prices offered by your competitors by just doing a market visit and checking the price of products.
Following competitor pricing helps you reduce the time and efforts involved in doing research and calculations for pricing your products or services.
2. Low-risk method
The competitor pricing strategy involves low to minimal risk while determining the pricing of your products or services. This is because your competitors have already priced their own products in such a way that they are able to capture a significant pie of the market share and work their way without facing any operational issues or having any bankruptcy.
More focus on product quality and marketing
When you price your products similar to prices offered by your competitors, you take away a large part of the uncertainty of the performance of your product. You can use the money, time and efforts on more productive tasks like improving product quality further, reaching out to the maximum number of customers and marketing of your products & services.
Issues with Competitive Pricing
1. Deciding prices without due-diligence
Costs vary from company to company. Some companies may have higher production costs, marketing costs, employee overheads as compared to other companies. While competitive pricing ensures you price your products according to the prices set by your competitors, it does not take into account all the costs involved.
Take into account factors like costs involved, quality of the products, the value being offered to the customer, geographical market research, etc. to arrive at the final price.
2. Aggressive competitor pricing may impact profitability
A new company entering the market may decide to price its products at a lower price than its competitors just to grab an entry into the market. For example, a company may price its products at $10 just because its competitor may be selling products at the same price. However, the first company’s production cost maybe $3 whereas it maybe $6 for the second company.
Due diligence has to be taken while deciding prices using a competitive pricing strategy by taking such things into account. Aggressive competitor pricing is harmful not just for individual companies but also for the market or industry in general.
3. Saturation level
Competitor pricing, when done for a long time, may result in a saturation level being reached for similar products in the market. This saturation level is not beneficial to the economy as well as the individual customers.
For example, in a market with three players offering the same products, there is a new 4th entrant who tries to introduce their products in the market at a competitive price lesser than the price of products offered by competitors. Looking at the 4th player’s prices, the other company’s may also reduce their product prices.
This cycle may reach a certain level where they cannot reduce the prices any more (due to profitability). This may result in a saturation level wherein profitability may be at stress, and further improvements to product quality or marketing may not be possible due to reduced margins- ultimately impacting the customer.
Examples of Competitive Pricing
#1 Consider a multinational company that is launching its products in a new country. It has to set pricing for its products. The company will make a detailed study of the pricing offered by its competitors with the same products in the same geography and price their own products accordingly. This helps them take out the time and effort involved in trial and error pricing strategy. In case setting the product prices at par with their competitors impacts their profit margins, they will then have to work on a solution by working on overheads, packaging, advertising costs, etc.
#2 There are only two biscuit manufacturing companies operating in a particular city. Their biscuits have almost similar taste, ingredients, packaging, etc. Now, the company amongst these 2 who wants to capture more market share (at the cost of reduced profits) may price their products lower than their competitors so as to increase adoption rates among customers. In another case, both the companies may price their products in equilibrium (prices similar to products offered by competitors) and may spend more on advertising how their products are superior to their competitors.
Competitor pricing strategy is a widely used phenomenon across the world. We hope that this article helped you clear all your concepts pertaining to competitor pricing. We have tried to cover all the aspects in a very simple and lucid manner.
If you have any queries about the concept of competitor pricing, feel free to ask us your doubts via the comment box below.
Pinky is an MBA in Marketing from the University of Mumbai. She loves helping people out in learning Marketing and sharing latest ideas and tactics for growing businesses.