Effective pricing is the key to making profits, no matter which business you’re in. Business makes use of different pricing strategies with the view to maximize profitability (mostly) when selling products and services. They can also set the pricing in a way that defends a new entrant in the market.
Pricing is one of the most vital theories of the marketing mix and you need to consider a lot of factors while setting up the price for a particular product or service. Some of these factors include:
- Fixed and variable cost
- Company objectives
- Target customers and
- Market conditions
Let’s look at some of the common pricing strategies first.
Common Type of Pricing Strategies
Businesses use different pricing methods and some of them include:
The organization sets a low retail price in order to increase market share and overall sale. The firm usually increases the price, once it has a good hold on the market share.
An organization following this pricing strategy sets a high price initially. It lowers the price slowly to make the product available to a wider audience. The objective behind this strategy is to remove profit from the market slowly.
In this case, a pre-determined profit margin is added to the total cost of the product before setting the price.
This is somewhat similar to cost-plus strategy, except that the profit margin is added over the wholesale price of the product.
Optimal relationship between volume and price needs to be established to set the price by this method.
Competition pricing or competitor-based pricing is what most organizations follow. It is when you set up the price based on competitor’s behavior. Practically, a firm has three options—to charge the same price, to charge a higher price, or to charge a lower price.
There are various other methods of setting a price like product line pricing, bundle pricing, psychological pricing, premium pricing, cost-based pricing, and optional pricing.
However, here, we’ll look at competitor based pricing strategy in detail:
What Is Competitive Pricing?
As already mentioned, competitive pricing involves setting the price based on what your competitor is charging. Such a pricing strategy is usually used by businesses selling similar products or services.
Also, competitor based pricing strategy is used when the price of the service or product has reached its equilibrium. This happens only when the product has been in the market for a very long time and many substitutes of the product are available.
How To Set The Price Under Competitive Pricing Strategy?
Purchasing behavior of the customers is one of the most important things that you need to consider while setting the price under this method apart from the ones that have already been mentioned.
In order to ensure that your business makes a profit, the price of your product should be such that it covers production and company overhead costs. Don’t forget to add a suitable profit margin over the total cost as well.
Two important factors that you need to consider in order to set the right competitive price, are the product life cycle and the stage your product is in. Competition is something that doesn’t matter when the product is in its developmental stage.
As said already, competitor-based pricing strategy is valid only for products that have been in the market for a while along with competitors.
The choices available are—pricing your product lower, pricing it above, or setting the same price as your competitor.
- If you intend to set the price higher than your competitor, then try and bring in new and better features so that customers are ready to pay the higher price for a similar product.
- Set the price lower only if you can increase the volume without affecting the cost of production by a great margin. Set such a price only if you’re sure about making a profit, no matter how small the margin is.
- If you set the same price as your competitor, then you can make your competitors fall behind only when you can offer new and better features (at the same price).
Pros And Cons Of Competitive Pricing Strategy
Easy To Implement
Even if you have just one or two direct competitors in the market, you can easily set the price. Marketing and product managers would have to conduct a little research to find the price. Making price adjustments becomes easy and you can do so by following the changes made by competitors.
P.S. This, however, doesn’t hold true when comparing congruent goods like software products.
The risk involved is very low unless of course, you tamper with your product’s quality and features. This pricing strategy will never push you towards bankruptcy.
Competitor-based pricing strategy can be fairly accurate in industries that are saturated, like retail.
Large Missed Opportunities
Decreasing cost of production, increasing sales, and lowering overhead are common ways that businesses implement to raise profit. Pricing is often ignored and that’s a grave mistake, as price is one of the main consideration for customers. Setting the same price as your competitor can lead to loss of profits to a great extent.
Losing Touch With Demand
When you follow the competitor-based pricing strategy, you tend to make an assumption that every decision taken by your competitor is correct. This is true when there are just one or two businesses in the market and they have set the prices taking into consideration all the relevant factors. However, when many companies start using the same tactic, they tend to lose touch with demand and maintain the same price forever, unless of course, the competitor changes it.
Race To The Bottom
If you’re thinking that you can win over the market by offering a price lower than your competitor, then you’re mistaken. Having a lower price raises serious doubts on the quality in the minds of customers. You earn a lower revenue, even when you have customers who are ready to pay more.
Certain businesses, like retail, need to use competitive pricing extensively. However, they should not have the ‘set the price, forget it’ attitude. They still need to closely monitor the data and make changes (in terms of both price and features) as and when required to ensure that they don’t lose out on the profits.
A competitive-based strategy isn’t the best option for many businesses, especially the ones in the software space. When comparing congruent products, many factors need to be considered.