PLG Glossary | Competition-Based Pricing

What is a competition-based pricing strategy?

‍Competition-based pricing is a strategy where the price is set based on what the competitors in the market are charging. The price charged by your competitors gives you a foundation of customer expectations, and you can set the prices of your product or service based on the same.

Pricing is a vital aspect of your business with the highest impact on improving profits. Even a small optimization in the price can boost huge profits.

Competitor-based pricing is a standard pricing method, along with cost-based pricing, value-based pricing, and demand-based pricing. In a competitor-based pricing strategy, the focus is only on competitors' prices, not value to the customer. Unlike other strategies where factors like consumer demand and cost of production are considered, only public information about rival prices is the deciding factor here.

The following are a few ways the competitive pricing strategy may be utilized:

Pricing at par with competitors: This price matching strategy makes the most sense when your product and the rival product have no differentiating factors. Similar products and similar prices.
Underpricing the competitor: This a useful penetration pricing strategy, that is for entering the market, keeping prices lower than that of the competition, and gaining customers. It is a proven strategy for highly competitive markets and will increase market share in the long run. Especially suited for e-commerce, later product prices can be increased to increase profit margins. Similar to this is discounted pricing, setting lower prices than the competition in the scenario of physical stores offering a large number of products. Special care must be taken here not to spoil profit margins.

Pricing above competition: Charging a higher price than your competitors holds risk; it can work in your favor or prove unfavorable. A premium price may establish your brand as prestigious or niche, allowing you to recover investment quickly and establish your place, but it can also have a negative impact. It can affect sales and cause you to lose price-sensitive customers. Price skimming is another such strategy where initially, a product is introduced at a high price, and over time, the price is lowered to reach larger areas of the market.

Focusing on the competition for pricing decisions requires extensive market research and monitoring to know the market prices, how the rival products are placed about your product, and what differentiates them. This competitive intelligence will help you make profitable decisions in the long term. Integrating this knowledge with a dynamic pricing strategy can lead to maximum profits.

How to frame competition-based pricing strategy?

Research is undoubtedly the biggest part of framing a successful competitor-based pricing strategy. Understanding the price points of the top competitors in the market will give you a clear idea of customer expectations. This can become a foundation on which you base your prices.

The steps to building a competitor-based pricing strategy are as follows:

Identifying the competitors. The first step is to figure out who you are competing against. Which companies have similar products? What features differentiate your products? You can categorize them on the basis of market share, features offered, tenure, and so on. The companies with characteristics and profiles similar to yours are your direct competition.
Research price and positioning strategies. After shortlisting your competitors, conduct a competitive pricing analysis to understand their pricing model and positioning strategy. Apart from price points, pay attention to packaging, features, tiers being catered to, and relevant market trends. This will give you a comprehensive idea of customer expectations.
Average the price of all competitors. After gaining knowledge of current market prices, gather the pricing data and create a pricing map. An average price across competitors will be the benchmark price for comparison to the price of your product.
Choose higher, lower, or matched prices. The market research that you have put in will help you determine where your product or service fits into the market. You can use this position to decide your own pricing. Your product can be priced:
Higher-than-average: This premium price will indicate a luxury, niche position to potential customers.
Lower-than-average: This low selling price will help you acquire customers and gain a market share quickly.
Matched-with-average: This matched price will put you in line with direct competitors.

Advantages of competition-based pricing:

Simple and easy. In an industry with few direct competitors, it will require little research to arrive at a competitive price. Some adjustments and tweaks will lead you to a reasonable price for your product. However, complications may arise when products are not similar or offer different features.
Low risk. The risk of surprising customers with your price point is low as you would be close to what they expect and are used to seeing from competitors. Having observed the competition, you will have a grasp on the quality, target audience, and cost of production, and this will, at minimum, keep you afloat.
Accurate. Competitor-based pricing is fairly accurate, especially in saturated industries, as millions of customers of the products provide enough data to arrive at a fairly accurate price.
Evolves. The price adjustments happen simply when you align your product with the market. No guesswork is needed.

Disadvantages of competition-based pricing:

As with any model or approach, competitor-based pricing can have its disadvantages. Let’s break them down:

Detached from market factors. Competitor-based pricing looks at rival prices in isolation, not considering other factors like demand for your product or service or customer perception. These factors are not reflected in your competitor’s pricing and need to be studied as well. Neglecting them can result in precious revenue loss.
Limited flexibility. The entire competitor-based pricing strategy is based on the assumption that competitor prices are correct and their decisions are intelligent. The goals of the rival company may not align with your company goals, and the same can be said for cost base.
May not be the most profitable. Simply copying competitors’ prices can lead to lost revenue and incorrect pricing. You may be leaving out important pricing considerations like production cost, minimizing overhead cost, and feature differentiation. The goal of matching prices sometimes overtakes the goal of maximizing profits and minimizing production costs. Too many companies simply aligning with each other will soon be out of touch with the real market scenario, leading to missed opportunities for revenue growth.
Encourages short-term thinking. This strategy may encourage companies to set the price according to the market and forget about it. Pricing is a continuous process requiring attention. Data should be analyzed periodically and prices optimized and tweaked to boost profits.

When should you choose competition-based pricing over other strategies?

A successful pricing strategy is essential to set a price in line with rivals, yield a good profit, and maximize revenue. Many pricing strategies exist, all based on different factors. A business may prize profitability more than market share, and another may want to prevent competitors from increasing their share. Their choice of a pricing model will depend on their priorities.

Companies need to keep in mind production costs, profitability, price sensitivity, and many other factors while deciding on a price.

This strategy may not be the best in all scenarios but suited for the following:

Startups. For startups, this strategy gives a quick, acceptable price. Later, the price can be adjusted and optimized based on your value to the customer, taking the value-based pricing approach. With competitive intelligence, you are not at risk of setting too high or too low prices.
Highly competitive markets. Competitor-based pricing will help you arrive at an acceptable price, maybe matched to or may be lower as a penetration pricing to enter and gain market share.
Mature marketplaces. Again a place for competitor-based pricing as consumers have set expectations and price sensitivity has to be considered.
Companies with multi-tier products. Companies with products offered in multiple tiers can base the prices of their products using a competitor-based pricing technique to offer competition to rivals with low-cost options, as well as premium and matched prices at the same time.
E-commerce platforms. They are suited for this pricing model as consumers can compare the prices of items on multiple platforms with a single click. Setting prices in e-commerce requires a combination of competitor’s pricing strategies and value-based pricing, keeping in my mind the value of the product to the consumer.

Key takeaways

Competition-based pricing as a strategy looks deceptively easy; no complex calculations are needed, simply align with competition, and you are good to go. In reality, it requires price intelligence based on extensive research and in-depth knowledge of the market, competition, and target audience. Constant effort is needed to conduct competitive price analysis and establish a price based on competition that is profitable to your cost base without compromising on revenue.

In highly competitive markets, this strategy may be essential to penetrate the market and gain a customer base. Sellers simply have no control over prices.

Not the most suitable for a new market as well, when there may be few competitors. Also, the incorrect approach for a product that wants to position itself as new and innovative.

There is usually a need to combine multiple pricing strategies and evolve with the market. A competitor-based pricing strategy may give you a good start, but with time prices will need to be re-assessed and set using a combination of strategies.