Businesses are constantly trying to find ways to draw in customers and boost their profits. Resorting to competition-based pricing has emerged as a tactic for brands aiming to remain current and competitive in the market. This blog aims to shed light on this pricing strategy by delving into what it entails and the challenges that accompany the approach while also providing useful tips on implementing competition-based pricing.
When determining prices using the competitive approach, a business considers what competitors are charging for similar offerings. While the concept appears straightforward, putting it into practice requires that you understand the market environment and customer perspectives. Achieving success with this pricing strategy is only possible when you take other factors, such as market positioning and customer loyalty, into consideration, along with competitor prices.
Understanding Competition-Based Pricing
Competitive pricing involves observing the price at which a product or service is sold by competing brands rather than focusing on manufacturing expenses or customer perceptions of brand value. Take Coca-Cola, for example. They describe their pricing strategy as “meet-the-competition pricing”. They analyze how other brands selling the same category of beverage price their products and then determine their own costs. Thus, it doesn’t come as a surprise that a 500 ml bottle of Pepsi and a 500 ml bottle of Coca-Cola are sold at the same price in the market.
Importance of Competition-based Pricing in Pricing Decisions
Competition-based pricing plays a role in today’s business landscape, influencing a company’s competitiveness, profitability, and relevance. It goes beyond determining prices; it entails businesses being highly attuned to their market surroundings, competitors’ strategies, and customer demands. Let’s explore further the aspects that highlight the significance of competition-driven pricing.
Dependence on Market Trends
Competition-based pricing is important for a business to ensure its products or services are priced competitively within market standards. This is essential for attracting customers who are conscious of prices and tend to shop around for options before buying. By setting prices that match industry standards, businesses can establish themselves as competitors in the eyes of customers.
Competitive Edge
In markets where goods and services are frequently seen as similar, having a strategic pricing approach can make a company stand out. It allows businesses to position their products in a way that helps attract market segments. For instance, setting prices below that of competitors can draw in budget consumers, whereas aligning prices with premium products can indicate similar quality to what customers are willing to pay more for.
Customer Perception
The cost you set plays a role in shaping how customers view the value of a product or service. Competitor-driven pricing allows companies to find the balance between setting higher prices, which could drive away customers, and setting prices too low, which might lower the perceived value. When executed effectively, this approach can boost a company’s reputation by presenting it as a choice for consumers seeking value.
Dynamic Market Response
The market is always changing, with prices going down depending on what people want, how much of it there is, and other factors outside our control. Setting prices based on your competitors’ costs helps businesses stay flexible and ready for changes in the market situation. This might involve tweaking prices when a competing business offers a sale, or when a product is in demand, or when production costs are high. Being able to adjust prices when required is important for staying competitive and holding your own in the market.
Managing Profitability
Competition-based pricing goes beyond matching or beating competitor prices; it also serves as a factor in ensuring profitability. By grasping the pricing landscape in the market, companies can pinpoint chances to streamline their expenses and discover efficiencies that enable them to offer prices while safeguarding their margins.
Strategic Focus
To adopt a competition-driven pricing approach, one must conduct market analysis and consistently track competitors’ pricing strategies. This targeted method ensures that companies are deeply connected to the dynamics of their market. It prompts businesses to drive innovation through cost-cutting measures, product enhancements, or superior customer service to uphold pricing strategies.
Long-term Sustainability
Competition-based pricing plays a role in ensuring the lasting success of a business. By adjusting to market dynamics and competitive pressures, companies can maintain relevance among their desired customers. This ongoing relevance is essential for maintaining customer engagement and loyalty and ultimately attaining profitability and expansion.
Common Challenges
Deciding on prices based on competition can be advantageous for businesses looking to match market standards and competitor offerings. Nevertheless, this approach comes with its own set of challenges. Failure to handle these barriers adeptly could influence a business’s strategic direction, profitability, and long-term sustainability. Understanding these common hurdles is crucial for those aiming to implement this pricing strategy effectively.
Reduced Profit Margins
Competition-driven pricing poses the risk of shrinking profit margins. When companies strive to meet or beat prices, they often face the challenge of diminishing margins. This issue creates a scenario where price becomes the only distinguishing factor between two brands. Ultimately, this trend can reduce profitability over time and limit resources for R&D, marketing, and business expansion.
Overemphasis on Competitors
It’s important to stay abreast of what competitors are doing. However, focusing too much on their prices might cause businesses to overlook their own USPs and targeted strategies. By staying fixated on competition, there is always a danger of being reactive instead of proactive, leading to pricing decisions that are solely influenced by competitor actions rather than a thorough understanding of how customers perceive value and the long-term goals of the business.
Lack of Customer Focus
Sometimes, pricing strategies based on competition can divert attention from customer preferences. When businesses focus too much on matching prices with competitors, they may forget the significance of knowing what customers actually prioritize. This oversight could lead to pricing approaches that don’t connect well with target customers, possibly resulting in a loss of satisfaction and loyalty. If you want to succeed in the pricing game, it is important to grasp and cater to customer needs, where your prices should mirror not only market trends but also perceived product value.
Difficulty in Establishing Brand Value
Relying heavily on pricing can pose a hurdle for businesses in showcasing and defining their brand’s worth. When pricing takes the stage, the true value of a product or service, like its quality, customer service, or innovation, might not receive the attention it deserves from customers. This could impede a brand’s capacity to justify premium prices based on its strengths, ultimately restricting its opportunities for expansion and profitability.
Reactive Instead of Proactive Pricing
Businesses often face the challenge of reacting to pricing changes rather than proactively establishing their prices. Continuously altering prices to keep up with competitors can confuse customers and affect trust. Businesses must adopt a pricing approach that takes into account their environment and overall business goals. This way, price adjustments can be made thoughtfully and strategically instead of reacting impulsively to competitors’ moves.
Misinterpretation of Competitors’ Moves
Understanding competitors’ pricing strategies can be a daunting task. If businesses lack insight into their competitor’s costs, target audiences, and overall goals, they might misunderstand the motives behind price adjustments. This could lead to decisions that do not reflect the market conditions or the company’s strategic direction.
Impact on Businesses
Competition-driven pricing influences market position, profitability, and decision-making. Although this pricing approach helps adapt to market conditions and competition, its implications can permeate across business activities and long-term viability. Let’s delve into the ways competition-based pricing shapes businesses.
Market Positioning and Brand Perception
Competitive pricing plays an integral role in how your business is perceived in the market and how consumers view your brand. When you set your prices in line with those of your competitors, you can position yourself as a budget choice, attracting customers who prioritize price. However, this strategy can also make it harder for your business to stand out based on factors like quality, innovation or customer service. This could eventually impact how your brand is perceived, potentially categorizing it as a “budget” option even if though it offers value that consumers may not fully acknowledge.
Profitability Concerns
The impact competition-based pricing has on profitability is clear and immediate. When businesses strive to remain competitive, they often end up lowering prices, resulting in a reduction in profit margins. This trend is most noticeable in industries where consumers can easily switch between products, and pricing plays a role in their decision-making process. The continuous need to modify prices can force businesses to function with profit margins that restrict their capacity to invest in key areas like research and development, advertising, and employee training, all of which are essential for sustainable growth and staying ahead in the market.
Strategic Flexibility
Implementing a pricing strategy based on competition can affect a company’s adaptability in the long run. Paying too much attention to how your competitors price their products and services may result in hasty decisions on your part. These decisions can be focused on short-term price changes rather than aligning with strategic goals. This reactive approach could deter companies from pursuing avenues for growth beyond pricing considerations. Additionally, it may limit a company’s capacity to adjust or respond to pricing shifts that are all too common in today’s scenario.
Customer Relationships
The way prices are set can have an impact on how customers perceive a business. While offering lower prices might draw in customers who are always looking for a good deal, it can also create an ongoing expectation for discounts or lower prices. This can hamper customer relationships the moment you increase prices because you inadvertently attract consumers who don’t care about the value you offer. Moreover, constantly changing prices in response to competitors can confuse customers and make them question their trust in your brand.
Competition Dynamics
The use of competition-driven pricing can also influence the overall competitive landscape. This approach may trigger price wars, where businesses consistently lower prices to outdo one another, reducing profits throughout the industry. Eventually, this could lead to a market consolidation with the players capable of operating on slim profit margins, focusing on surviving rather than thriving. These dynamics could hinder innovation and limit consumer options.
Operational and Financial Stress
Businesses face financial and operational challenges that should not be overlooked. When constantly tracking competitor prices and making adjustments accordingly, it is easy to sacrifice substantial resources. This can lead to a shift in focus from areas such as customer service and product innovation.
Practical Tips
Implementing an effective competitive pricing strategy requires a planned approach that goes beyond simply matching or quoting lower than competitors’ prices. Here are a few practical tips that can help you maximize the strategy’s benefits while minimizing its downsides.
1. Conduct Thorough Market Research
If you want your pricing strategy to work for you, you need to have a deep understanding of the market that you operate in. Competitive pricing is about more than just knowing how much your counterpart is charging for a similar product. You need detailed insight into customer behavior, their preferences, and their sensitivity to price changes. Surveying the market on a regular basis can help businesses identify trends and anticipate changes that could affect product prices. This research should include direct competitors, as well as broader market forces and emerging players that could disrupt traditional pricing models.
2. Segment Your Market
Every consumer behaves differently when it comes to attaching value to a certain product or service. Make a note of the factors that affect their willingness to pay and segment your target buyers accordingly. Think about demographics, purchasing behavior, and product preferences, and then tailor your pricing strategies to different customer groups.
3. Monitor Competitors Closely but Strategically
Competitive pricing hinges on how closely you monitor your competitors. However, don’t follow everything they do to the T. Sure, keep track of how often they change their prices, when they offer promotions, and when they launch new products. But the key here is to analyze the rationale behind these moves. Are they responding to a change in costs, attempting to capture market share, or responding to another market force? By understanding the context of competitors’ pricing strategies, you can make more informed decisions about your pricing.
4. Differentiate Your Offering
In the era of price wars, ask yourself how your business and the products and services you offer stand out. What is it that makes your product unique? Do you guarantee better quality than what’s out there in the market, more dedicated customer support, or innovative features? Identify and communicate your USPs to justify a premium price without sacrificing brand value or profitability.
Let’s take Coca-Cola as an example once again. While they are priced in accordance with their largest competitor, Pepsico, they boast of peerless customer service, exceptional beverage quality, and better marketing strategies. According to Forbes’ 2020 List of The World’s Most Valuable Brands, Coca-Cola ranked at #6 with a brand value of $64.4 billions, while Pepsi ranked at #36 with a brand value of just $18.2 billions
5. Use Technology to Your Advantage
Pricing intelligence tools, analytics platforms, and AI-driven forecasting models can provide real-time insights into competitors’ pricing strategies and market dynamics. Technology can be of great help to businesses that aim to respond quickly to changes, optimize their pricing models, and predict the impact of their pricing decisions on demand and profitability.
6. Test and Learn
The market is constantly evolving, making it non-negotiable for businesses to adopt a test-and-learn approach to pricing. Experiment with different price levels, promotional strategies, and discounts to see what resonates best with your target market segments. Use A/B testing and monitor key performance indicators (KPIs) to measure the impact of pricing changes on sales volume, revenue, and profitability. This iterative approach can help businesses refine their pricing strategy over time, ensuring it remains aligned with market conditions and business objectives.
7. Maintain Pricing Flexibility
Finally, maintain flexibility in your pricing strategy. Based on the current market conditions, competitor actions, and customer preferences, keep enough scope for changing direction as you deem fit. It is important to note here that any changes you make to your product prices should be consistent with your overall brand strategy and value proposition to avoid confusing customers or diluting your brand.
Businesses need to grasp and handle competition-based pricing well to stay relevant in today’s market scenario. Although this pricing strategy comes with challenges, including lower profit margins, it also brings with it opportunities for targeted market positioning and swift market penetration. By understanding how this approach works, businesses can tackle these obstacles by striking the right balance between competitive pricing and maintaining a distinct value offering. For businesses looking to refine their pricing strategies further or explore other avenues of competitive differentiation, Rubick.ai offers a suite of services designed to enhance market positioning and profitability.
