competitive pricing strategy

Pricing Strategies for Small Businesses – Competitive Pricing

The competitive pricing strategy is by definition a strategy that considers what happens outside the perimeters of a business. It is more sophisticated than the Cost-Plus Pricing Strategy that was discussed in an earlier post.

Indeed, competitive pricing decisions involve significant market risks and managerial attention 1. So, if your business does not have the structure and culture to keep an eye on what is happening in the market for your product, you’ll probably have no sales or have lots of sales, but at a loss!

Let’s look a bit deeper at the practice of competitive pricing…

 

What is Competitive Pricing?

Competitive pricing consists of setting the price of your products at the same level as that of your competitors (Lokad). Hence the need for competitive pricing arise when consumer product starts to act like commodities.

For example: When two products have similar core features, but are produced by different companies, competition results. In fact, customers that can buy the same product from different retailers, will probably see where they can get the ‘best buy’. To that end your customers can do this without much effort – by doing a product/price search on the internet.

Therefore, you don’t want to price your products too far from that of your competitors…

How does Competitive pricing works?

This pricing strategy aims to set the price of a product or service depending on the competition’s price. Usually, the strategy is more common with businesses that sell consumer products. After all, there are more similar products coming from different businesses than there are similar services coming from them.

So what do business do when they practice pricing in a competitive market? They play ‘follow the leader’s price’  hoping to becoming so the leader! To that end, you should know exactly what is happening in the marketplace for your products. That is, what do your customers want at what price? And, is the price that your competitor asks for the product in line with your customer’s expectations?

You should know the rules of the game and be sharp enough to change your pricing strategy before your competitor does it for you…

What are the different options with Competitive Pricing?

There are four options for competitive pricing (NetRivals):

  1. Use the same price as your competitors – here you’re leading your customers to a direct price comparison. Indeed, they will most likely purchase the product with the most features, hopefully yours!

 

  1. Price your products slightly below your competitors – and immediately get more customers to buy your product. However, you need to keep an eye on your margins, otherwise you’ll may face financial ruin…

 

  1. Using a price that is slightly above that of your competitors – in other words, using ‘premium’ pricing. Doing this option, you need to provide a reason for your customers to pay a higher price. Your level of service and/or product features need to be exceptional better than that of your nearest competitor.

 

  1. Price matching – this option is for us – the lazy ones! It’s for businesses who don’t know, or cannot anticipate their competitors’ moves. So, they make the prices of their products exactly the same of their competitors and – then hope for the best…

Advantages and disadvantages using the Competitive Pricing strategy

There are opportunities and challenges with using the competitive pricing strategy. The advantages and disadvantages are tabled below (Medium)

AdvantagesDisadvantages
Control the competition by preventing losing market share and customers to the competitors.There is a risk of losing margins if you are only focusing on competitor's prices
Help you to keep your customer base stable and let your business grow by always offering competitive prices.In luxury markets it may harm customer loyalty and your brand image
It's the first steps of dynamic pricing, a more sophisticated approach that stands at the top of competitive pricing strategy. Retailers may assume that their competitors have priced their products correctly - only to find that it doesn't fit their company
It can be combined with some other pricing strategies to make it even more efficient. Many small companies doesn't have the resources to sustain a competitive pricing strategy

Concluding

There’re little excuses nowadays to be complacent with the happenings in the competitive environment of your business. Indeed, with the internet now a generation with us, there’re no more secrets to hide from your customers and competitors.

Sadly, being second in today’s competitive business environment is not good enough. You need to excel in every aspect of your business…

Read also: Achieve a Sustainable Competitive Advantage by Adopting Service Marketing Strategies

Notes

1 Rajagopal (ed), 2013. Marketing Decision Making and the Management of Pricing: Successful Business Tools, In: Advances in Marketing, Customer Relationship Management, and E-Services (AMCRMES) Book Series, Copyright © 2013 by IGI Global.

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Douw G Steyn

Douw G Steyn

Management consultant, blog writer, dreamer

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