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A business develops and applies several strategies to stay competitive in the market. Pricing strategies play a crucial role for any big or small and new or established business. Setting the right price is the key to fetching more customers, retaining existing ones, and boosting revenue growth. There are different types of pricing strategies but today we will discuss competitive pricing and how it works.
What is Competitive Pricing?
As per competitive pricing definition it is the process of choosing selected price points to make the most of the competitive market. It is a popular type of pricing strategy. In this type of pricing strategy, the prices are based on what competitors charge for similar products. The strategy can be used in both online and offline markets. It helps attract more customers and thereby increase the market share gradually.
For competitive pricing to be effective, a business must understand competitor pricing and how customers perceive value. As per surveys, it is indicated that a significant percentage of buyers felt that a good deal influenced their buying decision. Thus, brands must consider their competitor’s prices while pricing their own products/ services. A few factors to be considered while determining pricing are business cost structure, customer demand, and the price of similar products in the market.
The competition-based pricing strategy is more useful for businesses that sell similar products as the characteristics of most of the products remain similar. The pricing strategy is used when the price of a product reaches equilibrium, i.e. when the product has long been in the market to have substitutes.
Competitive Pricing Strategies
1. Price Skimming
Price skimming is a type of competitive pricing strategy. In this type of strategy, a company charges a higher price for its new product to optimize its profit margins. The strategy can prove to be useful when there is no or little competition in the market.
For example, every tech company uses this method of pricing. As the technology is new and just launched in the market it will be sold at a premium. And it also creates a feeling of exclusivity to the consumers since tech companies tend to launch products for a limited time.
2. Penetration Pricing
In the penetration pricing strategy, the company offers a low price for the new product to gain market share and discourage the competitors from entering the market.
The market becomes too competitive but while entering a new market, going with penetration pricing can help garner the attention of your target audience. As consumer preferences often rely on pricing as one of the most significant buying factors. PriceIntelGuru is the leading pricing company providing an in-depth analysis of pricing strategies and also the market trends in real-time.
3. Price Matching
Also known as parity pricing, the strategy works by matching the prices of its competitors. It helps in making sure that the customers don’t switch to the competitor’s products.
Now, every competitor can do that but ultimately your product will stand out. If the consumer finds your product better than your competitor’s then you can assure a longer customer life cycle from them. Here, you need to understand the fact that consumers will always tend to change their choices regarding a particular product but what you can get from our pricing tools is a deeper insight into consumer buying choices. Let us elaborate. Sometimes, pricing is not the only factor, so if you keep similar prices and still find no conversion, then it is time to get the help of experts like PriceIntelGuru to provide you with the possible results.
4. Premium Pricing
Premium pricing is when a company charges more for the products as compared to the competitors. Charging higher enables a business to differentiate itself from the competitors and create an image of a luxurious brand.
All kinds of automobile companies do such pricing. They have a specific target audience and provide only the best at a very high price. Consumers won’t like it if the pricing is down and they compare it with the quality of the product.
5. Loss Leader Pricing
The pricing strategy works by offering a low-priced product to expand the customer base. The aim is to make up for the low price with an increase in the sales volume. The strategy proves to be effective in markets where there is tough competition and the customers are price-sensitive.
Tips to Consider When Using Competitor-based Pricing Strategy:
1. A business must ensure that the prices charged by the competitors are accurate.
2. The prices charged by the competitors should align with what customers are willing to pay.
3. The prices charged by the competitors should be sustainable in the long run.
Benefits of Competitive Pricing
Competition-based pricing enables a business to make solid strategic decisions about pricing their products and services. There are several benefits of competitive pricing. It allows the companies to understand their position in the market in comparison to the competitors.
It also helps the companies in evaluating how price change will affect their business. It helps the companies track their progress over time and make required adjustments to remain ahead of the competitors.
One of the major benefits of competitive pricing is that it helps attract new customers to your business. When buyers see that a business offers products at a lower price than competitors, they are highly likely to give that business a try. It eventually leads to an increase in the sales volume and market share for the company.
Competitive pricing also helps in boosting the profit margins. Even if a company offers slightly lower prices than its competitors, they can still witness revenue growth as the company will be able to sell more products/ services.
Competitive pricing helps in building brand loyalty over time. Buyers who feel they get a good deal from a specific brand are likely to stick to that company in the future as well. This leads to repeat business and higher customer satisfaction.
Competitive Pricing Examples
1. Lower Price Strategy
Company X sells a specific model of headphones at $130 and their close competitor Y sells a similar headphone for $120. Company Y prices its product a little less to draw cost-conscious buyers.
2. Higher Price Strategy
Companies A and B are the largest competitors in the digital camera market. A new company X wishes to enter the market and performs research to find out that company A sells the camera at $300, while B sells at $ 375. Company X decided to offer a premium digital camera and priced it at $450. Customers will pay more to company X as it offers additional features.
3. Equal Price Strategy
Company A sells sunglasses and company B wants to enter the market. They find that company A sells their sunglasses at $100 and decides to price their sunglasses at $97 to attract the customers to pay a lower price.
Is Competitive Pricing Analysis Right for SAAS?
When it comes to testing a product when you are new to the market, a competitor pricing strategy can help. It needs a lot of research on what the competitors are doing, what they are offering and at what price they are offering. It helps determine your own pricing strategy.
While acquiring the first few customers, it can be tough to understand what pricing meets the needs of the customer base. Thus, a business can use data from competitors that have been in the market for a while. It not only helps with developing a competitive pricing strategy but also tests the water yourself.
To implement competitive pricing, a business needs a competitive pricing analysis tool which helps in assessing the prices of products/ services against the competitor prices. This analysis allows the business leaders to optimize their pricing strategies and remain competitive in their target market.
Gear up for 2024 with PriceIntelGuru
In today’s dynamic market landscape, it is imperative to go with a comprehensive pricing plan. You need to be on your toes and make choices that ensure conversion and also enhance profitability. To get a better understanding, request a demo today!