When it comes to setting the prices of your products, you can use many different pricing strategies. Competitive pricing is one such, it can be used to gain an advantage in saturated markets.
What is Competitive Pricing?
Competitive pricing is one of the four main pricing strategies. The other three are:
- Cost-Plus Pricing: You add a set margin to the cost of the product. The cost takes into account manufacturing and other overhead expenses. You then raise the price by a set margin
- Markup Pricing: This is applied by adding a percentage to the wholesale price
- Demand Pricing: As the name says, it is decided by the market demand for the product. By gauging the demand, you weigh the pros and cons of opting for profit margin or sales volume. If there is a huge demand for that product and you are sure you can make a lot of sales, a small profit margin might be enough. You can make up for it in sales volume.
Competitive pricing is often used in saturated markets where product prices have stabilized and you must now focus on increasing your sales. You have to stand out from the crowd to do this, and pricing is one of the factors that can set you apart. You can set your price above or below your major competitors. You can also choose to go with the crowd and match prices with your main competitors.
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To implement competitive pricing, you have to look not just at competitors, but your own profitability, your target customer segment, how price sensitive they are, current market demand for the product, etc.
There are three options in this pricing strategy, as mentioned before. You can set prices above or below your rivals, or you can price match.
Higher Price: You can set a price that is higher than the average price of the product. You can set this premium pricing if you have established your brand as a premium brand. Or if you are offering some special features or service. For instance, your product might have a feature that is not present in competing products. You provide a better warranty, free delivery and good after-sales service, an extended warranty etc. The premium pricing must be justified in the minds of the customer, otherwise the higher price will be a major put-off.
Lower Price: If your product is very similar to competing products, you may want to set a lower price than your competitors to attract more customers. To do this, you must be able to afford the low profit margin, you must be able to compensate for this by selling a lot more units. You should also take care to avoid a race to the bottom of the barrel in price wars.
Price Matching: You can also choose to match prices with your competition. You can implement a dynamic pricing solution to constantly adjust prices against your rivals, or you can offer explicit price matches. That is, you can announce that you price match with a certain major competitor. Then it becomes the customer’s responsibility to ask for a price match by providing proof of a lower price at another store. This way, you only provide price match for those customers who ask for it. You then have a set of happy shoppers who will keep coming back, and you also avoid actually having to lower the product price for everyone.
The Pros of Competitive Pricing
- Competitive pricing allows you to leverage competitor prices to your advantage
- By setting premium prices, you draw attention to your product or service and highlight its advantages to the customer, to convince them to accept the higher price.
- With love prices, you can attract more customers by letting them save money buying a product with similar features as the competition, at a lesser price
- Price matching prevents the competition from luring your customers away with their lower prices.
The Cons of Competitive Pricing
- Competitive pricing can lead to price wars
- You can then get involved n a race to the bottom
- If you do not implement proper pricing rules, you may end up with prices so low that even a huge sales volume may not be enough to recover your costs
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Price optimization, especially competitive pricing, is hard to implement manually. You have to consider so many different factors within your own business and also take into account external elements, like competitor strategies. You can implement a good price optimization solution to automate the process. A software like Intelligence Node’s InOptimizer can collect and analyze data from varied sources to adjust prices within the parameters you set.