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What is competitive pricing?

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Last editedMay 20212 min read

You’ll always be competing with other businesses no matter what you do, but sometimes competition has advantages. Here’s how taking your rivals on with competitive pricing could work in your favour.

Competitive pricing definition

A simple definition of competitive pricing is when you create product prices based on the prices being offered by your competitors. Of course, that’s the simplest explanation, but it can also be a genuinely useful business and research tool. For example, if you’re a brand-new business, you may not have enough customers to understand your core customer persona and the prices they would prefer. You can overcome this issue by looking at companies that offer similar products to your own, and who are serving the sort of customers you want to attract. You can then aim to match or – if you can – better their prices to appeal to these customers. This can be especially useful for SaaS pricing.

How to use pricing

There are a few ways you can go about forming a basic pricing strategy, including:

Cost plus

This is the most basic cost method. It doesn’t pay any attention to your competitors, or even your customers, it simply makes sure you’re creating a price that makes financial sense. Cost plus pricing is usually the first step to creating a basic price range, but competitor research is needed to set a price that will attract customers.

Penetration pricing

This is a sort of competitive pricing method for businesses that want to enter a new market. Naturally, your brand will be at a disadvantage compared to well-established firms that are already operating in your chosen market space. New businesses may choose to create competitive pricing that is deliberately lower than competitors to grab customer attention. Once your brand is established, you can increase your prices.

Demand pricing strategy

This is when your prices change depending on demand. For example, during school holidays, the cost of flights increases. While this doesn’t directly challenge the competition, you can look at competitors to understand when and by how much you should adjust your pricing.

Competitive pricing methods

Making your prices competitive can be done a few ways, but generally, you can charge higher, lower, or at the same rate as your competitors.

Going higher means you need to present the customer with something that justifies this cost. In some cases this can be as simple as branding and packaging (just think of branded vs. supermarket own-brand items). In others, there will need to be a clear benefit, like organic ingredients, ergonomic design, or better technical specs.

Going lower means you can push your brand’s value for money and appeal to customers who prefer more cost-effective products/services. Going lower permanently isn’t always a great idea, but for things like introductory prices and special promotions, going low can definitely pay off.

Maintaining the same rate as your competitors is also known as price matching. Sometimes this is a perfectly valid choice, especially if you feel your product gives added value compared to others that are sold at the same price.

Competitive pricing advantages

There are several competitive pricing advantages. For one, it’s relatively simple. It’s also an accurate way of seeing what customers are willing to pay, so you know how likely your own pricing is to appeal to your target market. Plus, with the structure provided by real-time pricing, it’s relatively difficult to completely miss your mark and create a price no one is willing to pay.

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