Competition is one of the primary forces driving the market growth. When there is high competition, one can ensure companies are looking for appealing prices and presenting products of higher quality. When there is no competition, one can speak of conditions for a monopoly to emerge, which is frowned upon and often illegal. Here, we would like to explore competitive-based pricing from the angle of its nature and the benefits it can bring to retail and any other business.
The defining aspects of competitive based pricing
Competitor-based pricing strategy can have many angles and elements to include. However, when it comes to the gist of the approach, its core relies upon using smart pricing to adjust to particular market conditions and competitors’ strategies. A greater number of firms use various innovative pricing approaches to get ahead of the competition. Some use product matching software and other kinds of software because the ability to collect and analyze data fast is extremely valuable.
In simple terms, competitive-based pricing uses price to deal with competitors and various market conditions. You can raise or lower the price depending on what your company intends to achieve.
Why might businesses consider competitive based pricing?
There is a great number of reasons businesses may consider competitive based pricing. It is often considered one of the most common practices for retail firms. The conditions for the emergence of competitive pricing occur when a market includes several companies offering similar products of approximately the same quality and pricing. In such regard, companies can compare the prices of their competitors to adjust their pricing.
Essentially, companies need competitive based pricing to understand how the market shifts and what rivals intend to do in terms of pricing. However, there are always some obstacles to consider when implementing market based pricing. What is more, firms need to be extremely careful when pricing SKUs compared to competitors.
Finally, businesses might consider competitive pricing to keep up with technological innovation. There are currently various tools available that can grant firms an edge in competing against rivals. Product matching is an example of one of such instruments. It is an advanced software using top-notch algorithms to analyze different variables and product best pricing strategies one can find on the market.
Pros and cons of competitive based pricing
As with any pricing strategy, competitive pricing has particular advantages and disadvantages. Starting with the pros, one should refer to the following:
- Revenue increase. Proper pricing results in companies selling more products, which naturally translates into revenue growth.
- Competitive advantage. Setting more attractive prices gets the attention of consumers, which results in a greater competitive advantage.
- Flexibility. Competitive pricing is great because it grants the ability to choose between various price points.
- Consumer loyalty. Offering prices that customers like is a sure way to win their loyalty and create the conditions for prolonged cooperation.
From a contrasting perspective, there are certain cons to competitive based pricing. Referring to the most prominent ones, there are the following to mention:
- Margin cost losses. A company can focus too much on competitors’ strategies, thus forgetting other important factors. As an outcome, it can lead to margin cost losses.
- Categorization of competitors. It can be difficult to properly categorize rivals in markets with many competitors to know which ones to follow.
- Inaccurate data. A firm can make calculations based on inadequate data or the one obtained from noncredible sources.
- Improper decision-making. Competitive pricing is all about making decisions based on several variables and factors. If they are inaccurate, it will translate into improper business decisions.
At this point, competitive pricing has its advantages and disadvantages. The importance of choosing a proper pricing approach is hard to overestimate. Always
Guideline for competitive based pricing implementation
Adoption of a competitive strategy requires the following several steps:
- Consider all the prices, deals, and benchmarks available. It is crucial to collect all the factors required to correlate competitive pricing to what a company intends to achieve.
- Align business objectives to competitive pricing strategy. Competitive pricing should be linked to the firm’s objectives. In such a case, if a business does not align its prices to business goals, one will receive a decrease in customer loyalty.
- Evaluate the data available and estimate the sources of data accessible. Competitive pricing works with massive volumes of data. However, data can be different, as well as it can present various insights. At this point, determining high-quality data is vital at this step.
- Collect and analyze the data to further its synthesis into pricing suggestions. One should choose methods to collect data, for instance, use advanced software based on AI and ML algorithms. Yet, one should determine whether data sources are credible before collecting the data.
Following these steps is the foundational approach to ensuring competitive pricing brings benefits or harms.
Coca-Cola vs. Pepsi
There is a notable example to consider to see how competitive pricing pans out in real life. Coca-Cola and Pepsi are two giant companies existing in the same market and having similar products delivered through identical price points. In standard conditions, Coca-Cola and Pepsi would have difficulty gaining a competitive advantage. Respectively, in such a case lowering prices is one of the key aspects of dealing with competition.
Since the products of these two companies are relatively similar, Coca-Cola employed a pricing strategy that set lower prices than the competitor Pepsi. As a result, Coca-Cola managed to increase its revenue through the high production volumes and yet with a lower price. The example shows how a simple measure of lowering prices can have a massive competitive advantage.
Recommendations and Conclusions
To get the most out of competitive pricing, it is crucial to get accurate data, assess data sources’ credibility, use innovative data analysis instruments, align the approach with current business objectives, and not rely too heavily on competitors. It is all about balancing being overly reliant on competitors’ strategies and underestimating them.