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What Is Competition-Based Pricing? What Are Its Advantages And Disadvantages?
If you are in the marketing business, you would know there are multiple factors that play a part in deciding the pricing for a product, especially in Competition Based Pricing. When you are deciding the price for an absolutely new product or service or reviewing the price of an existing product to increase your profits, you need to consider all the existing approaches and evaluate which one is the best option for your business Pricing primarily has three types. They are namely –
- Cost Plus Pricing
- Value-Based Pricing
- Competition Based Pricing
In this article, we will be discussing Competition Based Pricing. As the name suggests, it is a pricing strategy where you consider the price points of your competitors while deciding the price of your product or service.
Stay with me till the end as I discuss the details of Competition Based Pricing.
What Is Competition-Based Pricing?
Competitive-based pricing or competition-based pricing is a price model where the price points of your competitors heavily influence your price points. This is an approach that focuses extremely on the market rather than inwardly on the cost. It is mostly used when you are about to launch or have an already existing identical product or service as your competitors.
Competitive-based pricing opens up different approaches. Here are some competitive-based pricing examples.
Lowest Cost Offerings
Competition-based pricing can give you the strategic position of the lowest-cost option in the market. When you grab this position, you provide the product or service at a price that may as well be lower than its cost.
Being the Lowest is a viable option for some companies. However, you would need to either establish your plan to shift the consumers to higher profit options or be careful enough that your margins are not disappearing.
Premium Price Points
These are the opposites of the Lowest Cost Offering. Here, you charge a premium amount and position yourself above your competition. To do this successfully, you will need a solid brand or differentiation at a product or service level. To maintain this type of price positioning, you will need to constantly innovate and stay beyond the curve.
Price Match Promises
This is famous in the supermarket space. The Price March Promise is where an organization promises to match the price of the competition on a few items. It becomes a success if you cannot predict or research the price points of the competitor, but you are sure that you can match them. There are risks for sure, as the cost base may be heavily different compared to the ones you match; this method suits those companies that offer more than just one service or product.
Competition-Based Pricing Advantages And Disadvantages
Every pricing has its own advantages and disadvantages. Strategists measure these pros and cons and decide which pricing strategy works best for their needs.
It is important to have a thorough understanding of these advantages and disadvantages before implementing these strategies in your price points.
Advantages Of Competition Based Pricing
- Your price points will not surprise your customers.
- Your customers surely did some research about the price point. You will be able to extract some benefit from it.
- It is a fast approach to price points.
- You may add pressure on a market by entering with a low cost.
- The potential customers will see you as a dependable option, depending on the cost.
- You will get insights when you keep a close eye on the price change of the competitor.
Disadvantages Of Competition-Based Pricing
- There is a risk of profit as your cost base will likely differ from your competitors.
- You will feel extreme pressure from the price points of the external competitors.
- You will lack in-house insight into what prices your customers are accepting.
- As the competitors adapt, your competitive advantage will lose its longevity.
- It is very rare that you will be able to position your name as the premium option or the highest cost.
How To Set Up A Competition-Based Pricing Strategy?
Competition-based pricing strategy relies on how well you research your competitors and their total offerings to be able to factor those price points into your own consideration. One of the approaches to collating this information is charting all the prices against each other to be able to decide where you need to place your product.
You need to, however, keep in mind, if you are going forward with the competitive-based pricing strategy, that despite the price point of competitors being a top priority, you will still have to consider the cost and your desired profit.
Building A Competition Based Pricing Strategy
A solid competition-based pricing strategy requires intensive research. When you get an understanding of how your top competitors in the market are setting the price points for their products and how that pricing, in turn, may affect the expectations of the customers, you will have a foundation to decide the price of your new service or product.
Identify Who Are Your Competitions In The Market
The first and foremost step is to identify and determine who you consider as competition in the market. Which brands are selling similar services or products? This is the basic market research you must perform already.
Then, categorize these competitors by different characteristics like market share and tenure. Choose the companies that match the profile of your own brand. These are the top competitors you need to think about.
Research What Pricing And Positioning Strategies They Follow
Once you know well about your market competition, you need to do a competitive pricing analysis. This will help you dig into what pricing models and positioning strategies they are adopting to develop a map of the recent trends.
You need to make sure to not just look at their pricing but also how they are packaging. This research will help you get an understanding of what pricing or positioning the customers expect in the market so you may choose the best prices for your service or product.
Average All The Competitor Prices
Once you have all the prices in hand, you need to aggregate all the prices as well.
To calculate the aggregate, calculate the average of your product group across all the competitors. Once you know this average, you will have a threshold price. This will help you compare the rates of your own product.
Choose The Lower, Higher, Or Matched Prices
Once you are done researching the price points of the competitors, you are ready to decide which of your products or services fits the best into the market. There are three types which you may decide upon –
- Higher than average price
- Lower than average price
- Matched price
Whether you just stepped into the market or working to make your current standing even stronger, the price you decide upon will inform you of the perceived value the customers have of your brand. Just remember that competitive-based pricing, just like every other pricing model, does not optimize your brand for growth.
Wrapping Up
Upon reaching a conclusion, I would like to confirm that we do recommend competition-based pricing. However, I do not suggest that it is the pricing model that remains above all. It is a brilliant tool if you want to understand the current market or the general customer expectations of pricing. But, it does not give you the whole picture.
To summarize, some businesses use competition-based pricing heavily as their customers’ prices compare, and the cost of switching from one store to another is quite low. Yet, for other businesses, competitive pricing is not the major tenet of their pricing strategy, as there are multiple variables to take into consideration when you are not comparing congruent products.
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