So you’ve developed a great product, and you’re feeling confident about the value you’re bringing to market. But the competition is fierce, and you’re not sure how to attract customers. Enter competitive pricing.
There are cases in which a business brings an entirely new product or service to the marketplace and is able to set prices as high as customers will tolerate. However, most companies are up against established rivals who compete on price. Let’s explore what competitive pricing is, some common strategies, and ways your company can use it to stay ahead of the competition.
What you’ll learn:
- What is competitive pricing?
- Importance of competitive pricing in business
- Types of competitive pricing strategies
- Pros and cons of competitive pricing
- Steps to developing a competitive pricing strategy
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What is competitive pricing?
Competitive pricing is when you set prices based on what your competition offers. It’s often used in markets with tight competition where products are relatively similar and the products’ perceived value is stable. Take coffee shops, for instance. Whether they’re owned by global corporations or independent operators, most will charge between $3 and $4 for a large cup of black coffee, so customers have become accustomed to (and now expect) a price within that range.
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Importance of competitive pricing in business
It’s a struggle to win new customers and keep them, and companies employ a host of tactics to gain an edge. Competitive pricing is just one of these tactics, but it can play a big role in enabling businesses to achieve target objectives.
Ask any sales professional, and they’ll tell you how powerful it is to have the flexibility to adjust pricing. If you’re in a crowded market, you probably won’t have much choice. The alternative? Watch the loss column grow, and prepare for an uncomfortable conversation with company leadership.
That said, as you adopt a competitive pricing strategy, you might discover that while you can drop prices in response to a competitor, matching or going lower can also have negative repercussions. Your business will have to set firm red lines that cannot be crossed, no matter how badly the sales team wants to close a deal. So, if your company can’t match or lower prices in response to a competitor, then it’s important to be transparent with customers so they know why you’ve set prices at the current level. That honesty can build trust between your organization and your customers.
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Types of competitive pricing strategies
Say that two chain coffee shops are in direct competition in a neighborhood near a college campus. While the two shops might have slight differences in their coffee — such as roasters and suppliers — one might lower prices slightly to attract cost-conscious students, creating a competitive advantage. Betting that lowering the price will result in more customers, the manager assumes volume will offset the lower profit made from a single cup. That’s competitive pricing in a nutshell.
When evaluating a competition pricing strategy, there are two factors that will determine whether your efforts succeed. First, a rock-solid understanding of your products and services and the value they bring to customers should be considered table stakes. And that understanding must work hand-in-hand with data: accurate, timely information about your customers’ needs, demands, and pain points, as well as every aspect of what your competitors are doing. Let’s take a look at some commonly used competitive pricing strategies.
- Price matching: In competition-based pricing, price matching is one of the least risky strategies (though it can be dangerous if it leads to a “race to the bottom” scenario). As the name implies, it’s just matching the prices of your competition, a move preceded by price benchmarking, in which you evaluate and then meet a competitor’s pricing. This approach helps prevent losing market share and allows your business to concentrate on adding value, such as improving customer service or making your product easier to use. This strategy applies to almost any market, be it software or shampoo.
- Value-based pricing: This strategy relies heavily on customer perception of value, and it’s one in which targeted marketing plays an important role — both in consumer analysis and messaging. It involves highlighting the perceived value differences between your product and a competitor’s offerings, as well as playing into a customer’s desire to “keep up with the Joneses.” This strategy often works in high-end electronics, automobiles, and so on.
- Penetration pricing: A penetration pricing strategy involves drastically discounting a product, even to the point of selling it below cost. This tactic is often used by companies just entering a market, especially one marked by competitors with almost identical products. This can be risky, but it can make sense if a business plans to rely on upselling and cross-selling. However, it’s important to understand that this competitive pricing strategy should only be used temporarily. While it can work, the initial success of penetration pricing can evaporate if customers don’t perceive value or your business fails to cultivate loyalty. One example of penetration pricing is if an upstart solar panel manufacturer enters the marketplace; to get traction, it might heavily discount its panels to gain a foothold.
- Premium pricing: Counterintuitively, sometimes competitive pricing entails raising prices above what competitors are charging. This tends to be more effective in luxury markets or when customers perceive that a particular product or service is of higher quality. Take musical instruments. Discerning musicians might pay more for a guitar branded by a well-known star, associating the name with quality, expertise, and status. That instrument might not be materially much different than a similar make, but the customer sees value in it that spurs them to make a purchase. In cases of premium pricing, marketing can play a significant role in creating that sense of value; meanwhile, in-depth market analysis will illuminate whether customers will adopt and respond to the cachet associated with a higher-priced product.
Pros and cons of competitive pricing
Competitive pricing comes with benefits and potential drawbacks, of course. The path your business takes will depend on a host of factors: market segment, maturity, geographic location, and more. Take these factors into consideration before diving into a strategy, and be prepared to pivot as necessary.
The Pros
- It can help grow or protect market share. Whether it’s a market leader or a new player in the field trying to erode the lead of an established competitor, every company strives to land the biggest piece of market share it can. Competitive pricing can help peel away those valuable customers or keep them where they are.
- When successfully used, it can boost profits. If the price is right, and you can attract enough customers, you can make a profit on higher volume.
- It’s fairly easy to implement. There are times when a high-risk, high-reward strategy is appropriate. Yet minimizing risk tends to be a smart move, and competitive-based pricing falls into that category.
The Cons
- Competitive pricing can lead to the dreaded price spiral. An industry with competitive price maneuvering can get out of control, leading to a race to the bottom. All the players begin to see profit margins sink or disappear entirely, and the perceived value of the product type can take a hit, too.
- It can become the path of least resistance, even when no longer effective. As mentioned, competitive pricing can be easy to put in place, but doing it automatically — even when it no longer makes sense — can be a risky move. Like any business tactic, competitive pricing must be reviewed regularly to see if it still helps the company achieve its goals. If profit margins become razor thin or customers start to doubt the value of the product, it’s time to change tactics.
- Following in the ill-advised footsteps of the competition. Nobody’s perfect, and that includes your competition. If they undervalue their product and you match their price, you will have undercut your profitability and brand image.
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Steps to developing a competitive pricing strategy
Developing a competitive pricing strategy isn’t for the faint of heart — it’s a process that shifts with the marketplace and your company’s needs. That’s why starting small is the best way to go. Eventually, you’ll likely want to invest in a revenue management platform, but it’s best to hold off until your sales organization has a solid process in place — and the internal discipline to hew to that process.
- Get your data in order. As always, your CRM will be the most important piece of technology for adopting a competitive pricing strategy. Start by getting your pricing data in order. Clean it up and be sure your entire organization knows it well. That includes data related to discounting. Track how often clients ask for discounts as well as the amounts requested. Your CRM is an ideal place to house that data, and it can reveal whether your competitive pricing strategy is working. It’s also critical to monitor margin health data. Given the cost of goods and your current price points, what kind of profits are you making? How much leeway does your sales organization have when lowering standard pricing or offering discounts?
- Conduct market analysis. No competitive pricing strategy should be adopted without in-depth market analysis, including loss data. Every sales professional knows the pain of seeing a prospect sign with a competitor, but each loss yields a treasure trove of competitive intelligence. Be sure to build a data-driven, repeatable process around it, and encourage your sales team to lean into those difficult conversations. Meanwhile, pay close attention to your competitors’ pricing. If they’re offering a similar product at the same price point, consider your plan of attack. Say your product’s current price is $500. Do you offer a 10% discount? Or will you find another way to add value to your offering?
- Set clear pricing goals. Maybe you’re scrambling for a foothold in the market or need to fend off a rising competitor. Or perhaps you just want to boost profits. Chart your path and make sure everyone in your organization is on the same page.
- Consider dynamic pricing. Once you have a solid competitive pricing strategy in place, your business can lean into dynamic pricing as a tactic. Based on three factors — supply and demand, competitor pricing, and inventory levels (if applicable) — dynamic pricing can help your sales team rapidly adjust to shifting market conditions. A solid CRM will take your sanitized data (again, accurate data is paramount) and automatically provide floor and ceiling pricing on a granular level. It’s a powerful tool that can mean the difference between a win and a loss.
Gain an edge with competitive pricing
If you’re in a mature marketplace featuring rivals with similar products or services to yours, now is the time to explore competitive pricing. Easy to implement and eminently flexible, this important business strategy can help you gain new customers and keep the ones you have, and it can be the linchpin in an agile, responsive sales plan.
Remember, the irreplaceable element in a successful competitive pricing strategy is data. A solid CRM paired with an effective, easy-to-use sales management tool will make this tactic far easier and more effective. But be sure to consider how the technology is currently evolving — just as the marketplace constantly changes, so do the tools. Consider exploring the use of AI — specifically large language models — to gain real-time feedback on your pricing strategy as well as your product and pricing composition. Your bottom line will depend on it.
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