Competitive pricing is a strategy used by businesses to set the price for their products or services based on the prices of their competitors. This strategy involves analysing the prices of similar products or services offered by other companies and setting prices that are either similar to or lower than those of the competition.
Businesses should pay attention to competitive pricing for several reasons.
One of the main reasons is that it helps to ensure that the business remains competitive in the marketplace. When prices are set too high, customers may choose to buy from the competition instead. On the other hand, prices that are set too low can result in reduced profits.
Another reason is that competitive pricing can help a business to understand their market position, customers' willingness to pay, and willingness to compete. Additionally, it can also provide an opportunity to differentiate the company's products or services by highlighting the unique features or benefits that they offer over the competition.
In general, competitive pricing is important for businesses of all sizes and in all industries, as it allows them to remain competitive in the marketplace, maintain or grow their customer base, and increase their profits.
There are many different ways that businesses can define their competitive pricing strategies, and the best approach will depend on the specific circumstances of the business, such as the industry they are in, their target market, and the products or services they offer
Some common examples of competitive pricing strategies include:
Cost-plus pricing This strategy involves setting the price of a product or service by adding a markup to the cost of producing it. This can help ensure that the business is making a profit on each sale, but it doesn't take into account the prices of the competition. Price skimming This strategy involves setting a high price when a product or service is first introduced and then gradually lowering the price over time. This can help to maximize profits early on, but it can also lead to reduced demand later on. Penetration pricing This strategy involves setting a low price when a product or service is first introduced in order to gain market share. This can help to increase demand for the product or service, but it can also lead to reduced profits. Dynamic pricing This strategy involves setting prices based on real-time market conditions and factors such as supply and demand. It allows businesses to adapt prices quickly to respond to changes in the market. Value-based pricing This strategy involves setting prices based on the perceived value of a product or service to the customer. This takes into account the unique features and benefits of the product or service, as well as the prices of the competition.
Why increased profit is defined by competitive price?
Increased profit is often defined by competitive pricing because the price of a product or service is one of the main factors that customers consider when making a purchase.
When prices are set too high, customers may choose to buy from the competition instead, which can lead to reduced sales and profits for the business. On the other hand, when prices are set at a competitive level, customers are more likely to choose the business's products or services, which can lead to increased sales and profits.
Additionally, setting prices at a competitive level can also help to attract new customers, retain existing customers, and build brand loyalty. When customers perceive that a business is offering good value for the money, they are more likely to become repeat customers and recommend the business to others.
Also, in some cases, a business may need to lower their prices to stay competitive, which could lead to increased profits in the long term. When a company sets its prices too high and their competitors are much cheaper, they might lose customers and market share, but by lowering their prices, they could regain some or all of those customers and grow their market share, resulting in increased profitability.
Furthermore, through understanding the competition and market conditions, a business can identify where they can cut costs and increase efficiency to be able to maintain profitability even with lower prices.
How do successful businesses maximise their profit by setting competitive prices?
"The price is the most powerful element of the marketing mix. It sends a clear signal about the product’s value and quality." Dr. Philip Kotler
Successful businesses maximise their profit by setting competitive prices as it helps them attract more customers, build brand loyalty, create a reputation for fairness, increase market share and maintain profitability. Setting competitive prices is not only about being the cheapest in the market, it's about finding the right balance between what the customer is willing to pay and what the business needs to make a profit.
Here are some examples of how renowned successful businesses maximise their profit by setting competitive prices.
Dell Computers What they do: Dell uses a dynamic pricing strategy, adjusting prices in real time based on supply and demand. By constantly monitoring market conditions and consumer demand, they are able to set prices that maximise profit while remaining competitive in the market. (reference: "Dynamic Pricing in the Presence of Strategic Consumers" by Rakesh Vohra) Uber What they do: Uber uses a combination of surge pricing and dynamic pricing to maximize profit. During times of high demand, such as during rush hour or during bad weather, prices increase to match demand. This helps to ensure that there are always enough drivers on the road to meet demand and maximises profit for the company and its drivers. (reference: "Dynamic Pricing in the Sharing Economy: The Case of Uber" by Gautam Jain and Karthik Kannan)
Amazon What they do: Amazon uses a combination of cost-plus pricing and dynamic pricing to maximize profit. They set prices based on their own costs, but also take into account competitors’ prices and changing market conditions to ensure that their prices remain competitive. They also use data to make decisions on discounts, promotions, and dynamic pricing. (reference: "Amazon's Pricing Strategy: How the E-Tail Giant Keeps its Prices Competitive" by Benjamin Edelman)
Simple steps to start defining your competitive pricing strategy
Defining a competitive pricing strategy can help a business set prices that will maximise profits while staying competitive in the marketplace. Here are some detailed steps that you can start follow to define their competitive pricing strategy:
Identify your target market Understand the demographics, purchasing habits, and pain points of your target customers. This will help you understand what they are willing to pay for your product or service.
Research the competition Look at the prices and pricing strategies of your direct and indirect competitors. This will give you an idea of the going rate for similar products or services in your market.
Determine your costs Calculate all of the costs associated with producing, distributing, and promoting your product or service. This will help you understand how much you need to charge to make a profit.
Understand the value of your product or service Consider the unique features and benefits of your product or service, and how they compare to those of your competitors. This will help you determine how much you can charge for your offering.
Set a pricing goal Decide on a pricing goal, such as maximising profits or capturing a certain market share. This will guide the development of your pricing strategy.
Develop a pricing strategy Based on the information gathered in the previous steps, decide on a pricing strategy that aligns with your goal. This could be cost-plus pricing, value-based pricing, penetration pricing, etc.
Monitor and adjust Continuously monitor the prices of your competitors and the demand for your product or service, and adjust your pricing as needed. This will help you stay competitive and achieve your pricing goals.
Note that the above steps are general guidelines, and the best approach will vary depending on the specific industry, product, or service, and your business. It may require some experimentation, and multiple pricing strategies might be tested before finding the one that works best for the business.