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Competition Based Pricing Guide

Choosing strategic price points to take advantage of a product or service market in relation to competition is the process of implementing competitive pricing. Businesses that sell similar products are more likely to use this pricing strategy because services can differ from one company to the next while product characteristics remain constant. In most cases, this pricing strategy is employed when a product or service has been on the market for some time and has a wide range of competitive alternatives available.

Jan 15, 202267.7K Shares1.2M ViewsWritten By: Alastair MartinReviewed By: James Smith
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  1. What Is Competition Based Pricing?
  2. Concept And Advantages
  3. When Is It Best To Use Competition Based Pricing?
  4. When Is It Not Advisable To Use A Pricing Strategy Based On Competition?

Research is the foundation of an effective pricing strategy that takes competitors into account.In order to set prices for your product or service's rates, you need to know how your top competitors are pricing their products and how that pricing affects customers' expectations.

Software as a service (SaaS) and subscription businesses must pay close attention to market alignment.You cannot survive in a competitive market if you don't meet your customers' expectations when it comes to price, whether you're under or over the current trends.

One of the best ways to find this match is to use competitor-based pricing.To better structure your own pricing, it helps to see how competitors set their pricing tiers, what features they emphasize, and what they consider to be their core value.

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What Is Competition Based Pricing?

Comparable pricing, as the name implies, involves setting a product's price based on what the competition is charging.That being said, this strategy does not account for the upfront costs and only considers the selling prices of the competition's goods.

With competitor-based pricing, you must find a product that is exactly the same in order to set the price of your productThis means that if you intend to employ this strategy, you must first determine which products are your direct competitors.Competitor price monitoring software allows you to automatically connect from the EAN code of the products to do this efficiently.

In addition to cost-based pricing and market-based pricing, two other common pricing approaches are competitor-based pricing and pricing based on demand.In this post, we'll discuss pricing strategies based on the competition.

Concept And Advantages

As previously stated, competitive pricingis based on competitors' prices.The exact price level can vary depending on a company's brand, penetration tactics, or market aggressiveness.For example, to gain market share, a company must have one of the lowest prices.To build a successful brand image, a company should sell higher-priced products to convey a quality signal to consumers.

This pricing method is also commonly used in established and competitive markets.This is because in this type of market, competitors are already setting their prices at the equilibrium price.With this method, a company can move towards economic equilibrium while minimizing the risk of setting an inefficient price.

This method is simple because competitors' prices are often displayed publicly, making them easy to copy.As a result, it is often easier to copy competitors' prices than to implement a new pricing strategy.Using this method, the firm lets competitors bear the costs of determining a price.

This method is risk-free.If competitors' prices do not bankrupt them, it is likely to be the same for other firms on the market.While this method may cause some temporary inefficiencies (on one specific product) that may spread to the entire market, such situations are rare.

In this way, equilibrationEvery day, millions of customers and sales occur in the retail industry.Assuming that most retail players use competitive pricing, the market can reach a stable equilibrium price.

Firm “A” has been selling coffee makers for years and has two distinct products: a $25 entry-level model and a $50 high-end model.Years of testing different prices led to this equilibrium.Firm “A” would lose margin and market share if the entry-level product was cheaper.Likewise for the best coffee maker.Let us call this company B. It enters the market with two coffee makers, an entry-level and a premium.It is assumed that “A” has identified the best prices aimed at maximizing profit and reaching price equilibrium.The coffee maker market is mature, and consumer preferences are well-known.

Firm A and firm B diagram for costly pricing method and competitive pricing
Firm A and firm B diagram for costly pricing method and competitive pricing

This model illustrates the competitive pricing principle by allowing firm "B" to identify prices that are efficient for them without incurring any costs of price setting.

When Is It Best To Use Competition Based Pricing?

  • The most common use of competition-based pricing is for low-cost and commodity goods.
  • When a product's manufacturer or brand is of no interest to the customer, competitive pricing works
  • This approach is best suited for products that can be used in place of the original.

When Is It Not Advisable To Use A Pricing Strategy Based On Competition?

  • Is it possible for your product to stand out from the competition?It's a question of whether or not you're more productive than your competitors.
  • Is it possible to convince customers that paying more for your product is worth it because of the advantages they gain from purchasing and owning it?
  • Do you think your customers would be forced to pay more if you didn't provide your product or service?
  • How much are customers willing to pay for what they get?
  • Is your customer base truly 'shopping around' and comparing prices?Is this the whole gang, or just a few of them?The few people who do speak to sales teams frequently, and the rest of the time, they don't hear from them at all.

In order to determine if a competition-based strategy is the best option for your company, you can ask these questions.A value-based strategy may be a better option if one or more of the following questions are answered "yes."

Companies face margin erosion and a squeeze on profits as a result of rising inflation.As a result, the majority of businesses will have to look into ways to raise their prices in order to keep up with the competition.

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