One of the easiest ways to keep tabs on your competitors is to watch their prices. Making regular price adjustments to match or undercut similar offerings in the same market is a common tactic used by companies of all types and sizes. It’s called competition-based pricing.

But this is not just about getting ahead. It’s about meeting consumer expectations. Let’s take a closer look at how you can use this pricing strategy to attract customers.

What you’ll learn:

• What is competition-based pricing?
• Pros of competition-based pricing
• Cons of competition-based pricing
• 5 steps to build a competition-based pricing strategy
• What competition-based pricing looks like in practice

What is competition-based pricing?

Competition-based pricing is a practice where a business sets its prices at or below the prices of its competitors. Removing the primary focus from production costs and consumer demand, this pricing strategy centers largely on the competition.

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Pros of competition-based pricing

When executed well, competition-based pricing offers several advantages that boost a business’s chance of success. Here are a few:

Helps you create market alignment

Competition-based pricing helps you align your prices with the market. Customers often equate price with value, so meeting pricing expectations is important. If you price your products too high or too low, you can create unrealistic value expectations in customers’ minds. And this can negatively impact your sales. By matching competitive prices, you signal to your consumers that your product is on par with similar products.

Offers a competitive advantage

The effective use of competition-based pricing is a great way to one-up your rivals. By strategically setting your prices in response to competitors, you can secure some of their customer base and stay ahead in the market.

Straightforward and easy to implement

A key advantage of competition-based pricing is how simple it is to implement. All you have to do is pay attention to your top competitors and charge a little less. In contrast to other pricing strategies, competition based pricing doesn’t require extensive data analysis and consumer insight studies. This makes it a cost-effective option for new businesses or those looking to enter the market quickly.

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Cons of competition-based pricing

While competition-based pricing can be advantageous, it also comes with challenges. If you want to avoid potential pitfalls, it’s important to understand what they look like. Here are a few to consider:

Cuts into profit margins

Competition-based pricing doesn’t work for every business. Small businesses with limited budgets and businesses with high production costs are particularly at risk; setting prices too low to cover costs or deliver expected profit margins is not a good long-term pricing strategy for businesses that can’t afford it. Regularly review your cost structures to ensure your pricing strategy competes in the market and maintains the financial health of your business.

Compromises your brand

Competitive pricing can be advantageous. But it’s not always favorable to set your pricing in response to others. If you choose to use a competition-based pricing model, it shouldn’t come at the expense of your brand identity. Above all, don’t undermine your reputation or product quality for the sake of having the lowest price. Customers want a good value and price, so you should consider more than just your competition when choosing what to charge. Reflect on what makes your offering distinct and valuable. These are its unique selling points and should be considered in your pricing strategy.

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5 steps to build a competition-based pricing strategy

Building a successful competition based pricing strategy requires careful consideration and strategic planning. Consider these steps:

1. Conduct market analysis

Conduct a thorough analysis of your competitors, including their pricing models, market share, and target audience. You can use market research surveys, competitor analysis software, and industry reports to glean knowledge.

• Tip: Regularly visit competitor websites, subscribe to industry newsletters, and use price monitoring tools to stay updated on pricing changes and trends.

2. Research customer perceptions

Seek to understand how customers perceive your products’ value compared to competitors. If customers view your product as better quality than a competitor’s, you might justify a higher price point, enhancing your brand perception.

• Tip: Interview your customers and research target buyer behaviors on social media. See how they talk about your brand compared to others.

3. Set pricing objectives

Set clear goals for your pricing strategy. These could include increasing market share, maximizing profits, or entering a new market segment.

If your goal is to capture more market share, consider a pricing strategy that undercuts competitors while promoting profitability. The more attractive your prices are, the more buyers you stand to gain. This can increase your sales and market share simultaneously.

• Tip: You might also consider promotions, coupons, and other customer benefits, such as free shipping, to generate more interest and sales.

4. Assess costs and margin

Evaluate your cost structure to ensure pricing covers costs and maintains desired profit margins. Consider all factors, including production, distribution, and marketing costs.

• Tip: Develop a robust financial model that lets you simulate different pricing scenarios and their impact on your bottom line. This can help you mitigate risks before putting a pricing structure into practice.

5. Monitor trends and adapt as needed

The market is dynamic, and your pricing strategy needs to be dynamic, too. Continuously monitor market trends, competitor actions, and customer feedback to adjust your prices to suit your needs.

• Tip: Set up a dashboard to track key market and internal performance indicators, so you can quickly react and respond to changes.

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What competition-based pricing looks like in practice

To better understand how competition based pricing works in the real world, let’s look at a couple of examples:

1: Airlines — low fares + flexible policies

Competition-based pricing is prevalent in the airline industry. Take, for example, a business model for Airtastic Airlines. They focus on low-cost pricing, amazing customer service, and efficient operations. Because of this approach, they’ve been able to compete with other big-name airlines amid fluctuating economic conditions because of their commitment to providing the lowest prices for the most in-demand routes.

Here’s how their pricing changes to remain competitive:

• Pricing below competition: The airline continuously monitors competitor prices and adjusts its fares in response, often leading the way in price reductions that other low-price competitors follow.
• Pricing at competition: When demand is steady, the airline sets its prices in line with the competition, closely monitoring the market for changes in supply, demand, and pricing.
• Pricing above competition: During demand surges for specific flights or destinations, the airline may temporarily raise their prices slightly above the competition. Taking advantage of increased demand allows the airline to generate additional revenue, offsetting potential losses during other price cut periods.

Another attractive benefit is their cancellation policy, which allows customers to cancel their flight up to two hours before a departure and secure a full refund. It’s hard to compete with that.

2: The smartphone market — adjusting to competitor innovations

The smartphone industry — known for innovation and perceived value — presents a different challenge. Let’s look at another example:

When X Factor Mobile released its GeniusFone, it set a new price point for smartphones — under $50. They also offered service rates much lower than the market was used to. Competitors had to adjust their pricing strategies in response.

That meant not only matching X Factor’s prices but also offering competitive features at different price points, such as varying amounts of internal storage and increasingly sophisticated camera configurations. These efforts addressed both cost and perceived customer value.

The GeniusFone’s sales have recently decreased due to a lack of innovation, however, and other companies have jumped at the opportunity to get ahead. These competitors have focused on closing the market share gap with new hardware innovations — like foldable smartphones — at price points X Factor once owned. Now, customers can get the innovation they crave at price points X Factor introduced.

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Make sure your price is right

Competition-based pricing is like a high-stakes game of chess. Every move is calculated, and every decision plays a crucial role in market dynamics. The goal is to find that sweet spot where competition, business goals, and customer value intersect. If you can sell your product or service at an attractive price point for customers, while keeping the financial health of your business intact, this might be a great strategy for you.