What is competitive pricing?

For starters, competitive pricing can basically be defined as the standard setting of prices of both products and services based on competition pricing.

Competitive pricing is normally applied by businesses dealing with similar products, since services vary from entity to entity, while the features of a product remain identical. Price is an essential component when it comes to the marketing mix and as such, pricing can make or break a business. Discover our price monitoring software and our price tracker to improve your pricing strategy  !

Pricing Strategy Options

Competitive pricing is one out of four main pricing strategies. Other pricing strategies include:

  • Mark-up pricing which involves adding a percentage to the cost of the wholesale product
  • Demand pricing established by determining the relationship between profit and volume
  • Cost-plus pricing whereby a profit margin is included in the cost of the product.

Competitive Pricing Concept and Advantages

While competitive pricing depends on the competitors’ prices, certain factors also come into play when it comes to competitive pricing such as branding objectives, market penetration tactics, and also the exact price level.

As such, when a business wants to enhance its market share, then the business’s objective should be to have the lowest price in the competition. On the other hand, if a business wants a successful brand image, then it would be effective to price its products higher than its competitors to be able to exhibit the image of quality.

Therefore, competitive pricing method is normally used in highly charged competitive markets as well as within well-established entities the assumption being that equilibrium price has already been achieved. Some of the merits associated with competitive prices include:

Simple to adapt

This method is simple to adapt and implement as competitors prices are usually publicly displayed thus making it easy to adapt to. This is widely applied in the retail industry which deals with similar products, making it more efficient to adapt than to implement other pricing strategies.

Leads to equilibrium

With many retailors opting for competitive pricing method over other methods, the retail industry has been able to achieve a stable equilibrium price over the recent years due to the sheer nature of customers it attracts and sales it makes.

Low risk

Competition pricing is also associated with low-risk as the risk is spread across the board. For instance, if the prices of specific products result in bankruptcy, the impact will be felt in other businesses.

Factors to consider when establishing competitive prices

  • Life cycle of the product

In order to establish the optimal competitive price, it is important to consider the life cycle of the product and in which stage the product is. If the product is in its development stage, you can always opt for other pricing options other than competitive pricing. However, if the product is having relatively high number of substitutes, considering your competitors price is important to ensure the profitability and survivability of your business.

  • Consumer buying behaviour

Considering consumer purchasing behaviour is also an important aspect when it comes completion based pricing strategy. Some of the factors that business should take into account include competition, price sensitivity, and costs. Hence, it is essential for businesses to set price that fully cover all the production costs and its overhead costs in order to offer sustainable profits.

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