In 1970, a Nobel Prize-winning economist Dr. Milton Friedman argued that the goal of every business is to make money. Modern-day people can counter this claim by stating that a firm’s purpose is not only to make money, but also to support innovation, create jobs, and contribute to society. Yet, one of the primary goals of every for-profit company is still profit generation. Here, pricing plays a key role in determining whether it makes a profit, or if it suffers a loss.
There are several pricing strategies organizations can employ to maximize revenues and profits. One such strategy is competition-based pricing. This article explores why competition-based pricing is important, and why knowing a competitor’s price is critical to your company’s pricing strategy.
A Look at Competition-based Pricing
Pricing a product can be more complicated than pricing a service. This is because services usually vary from one business to another, which provides greater flexibility in determining their prices. However, similar products have similar attributes, so it’s difficult for product companies selling such products to compete based on any factor other than price. That’s why these companies must price their products in a way that can attract customers, sell more units, and (hopefully) maximize their profits. To this end, competition-based pricing can be a good strategy.
Competition-based pricing means pricing your products based on what your competitors are charging for a similar product.
Consider what type of products your company sells:
- Oral hygiene products?
- Wireless keyboards or mouses?
- Pillows or mattresses?
- Kitchen storage essentials?
Unless your products are truly innovative or unique, your competitors probably also sell something similar, and to the same target audience. So, competing based on product quality or features is out. The only way you can still compete is on the basis of price. That’s why it’s useful to take into account competitor pricing and price your products accordingly.
But what does “accordingly” mean in practice?
Well, you can price your product above, below, or on par with the competition. Which option should you choose?
- Price above the competition if your product warrants a premium price. This is possible if your product is similar to competitors’ products, but still offers better quality, or includes a few extra or unique features
- Price below if you want to expose customers to your other products, and believe that the sales from these products can make up for any potential loss from the low price of this product
- Price at-par if your product cannot differentiate itself from competitors’ products
Now reconsider your products, and choose the best-fit competition-based pricing strategy. If the market is already saturated with dozens of competing brands, at-par pricing may be your best option. But if you can promote other product lines to entice more customers, consider offering product bundles with a below-par price of the original product.
Finally, if your product can differentiate itself from competitors’ products, you don’t have to compete on the basis of price alone. Rather, you can set a premium price, and attract cost-agnostic customers.
Why is Competition-based Pricing Important?
Pricing strategies like cost-based pricing and dynamic pricing depend on analyzing factors like production cost, demand fluctuations, etc. Competition-based pricing is different since it depends on the prices your competitors set for products that are similar to yours.
For such products, customers almost always know the prices (or price ranges). So, if your prices are much higher than your competitors’ prices, they will most likely go to these competitors. The only exception is when you demonstrate that your products are somehow different or better than these other products.
However, if your products are similar to other products, you can’t compete on the basis of quality, service, innovative features, etc. In this case, you can only compete on the basis of price.
But to determine which strategy to adopt, you must know your product, as well as how competitors are pricing their (similar) products.
Competition-based pricing is important because it offers the following benefits:
- It’s relatively simple to implement and requires very little research to determine.
- You can easily adjust your prices, based on price adjustments made by competitors.
- If competitors are running special promotions, discounts, or flash sales, you can do the same with some tweaks to your marketing and promotional tactics
- If you understand your production cost, target audience, and product features, you can implement this strategy with minimal risk
- In industries with similar products (FMCG is an example), the strategy can produce respectable, even massive profits
You can also maintain a stable market share by adopting competition-based pricing.
Of course, you should also be aware of some of the drawbacks of competition-based pricing. For one, the strategy is based on a “follow the herd” principle. That’s why, if the market already consists of many other similar products, it’s unlikely that your product will become a market leader or capture a huge market share in a short time. Further, by simply copying competitors’ prices, you may end up pricing your products incorrectly, which may result in increased costs and lost profits.
Take this Home
While pricing your products, it is crucial to consider how your competitors are pricing their products, especially if the products are similar.
But first, identify these competitors, especially those who closely match your brand profile. Also research their product positioning, marketing, and pricing strategies. Analyze their pricing tiers, and how they determine these tiers. Look at the pricing data of each competitor, and the pricing data in aggregate to understand the market’s average price. Then decide if you should price your products at-par, below-par or above-par.
The product price you finally choose can attract more customers, increase your market share, and enhance your brand’s value. That’s why it’s important to get a handle on your competitors’ prices. So, make sure you do it right through experts! Ergode has been an alma mater to SMBs and has kept them ahead in race through its marketing and technological solutions. Want to know how? Click here.