Competitive pricing strategies index your company's prices to the prices of your competitors. But blindly charging the same price as the competition isn't always the best option for small business owners.
There are a variety of pricing strategies you can use to price your products and services.
But in some markets, especially markets loaded with companies selling the same products, competitive pricing strategies are the norm.
Unlike other pricing formats, competitive pricing strategies don't require complex formulas or pricing structures. Prices are based almost entirely on the prevailing prices of the marketplace. So if the competition is charging $100 for your product then guess what - you're probably going to price that product at $100, too.
But in certain scenarios, setting your prices at the same level as the competition isn't always a smart move. Once you have determined the competition's price point, you need to decide whether to match their price, beat their price, or increase your price. If you can convince customers that you deserve more for the product (e.g. through better customer service, warranties, package deals, etc.) then it makes sense to set a higher price than the competition. On the other hand, if you are absolutely positive that you can undercut everyone else on cost, you might want to drop the price and make the competition squirm.
Here a few more things to consider about competitive pricing:
- Market leaders. In competitive pricing markets, a single large company commonly sets prices for the entire industry. It's sometimes called a "follow the leader" price structure because once the larger company sets the price of a product, smaller companies have no choice but to follow their lead and do the same.
- Control. Competitive pricing makes sense in a lot of markets and industries, but it often puts small business owners at a disadvantage. Unless your company is the market leader, control over the price of your products is entirely out of your hands. It's possible to regain control, but only if you can distinguish your product from the competition on a non-price basis.
- Service industries. Although there are exceptions, competitive pricing doesn't usually affect service industries. Unlike commodity markets, service-based businesses are less likely to present identical offerings to the marketplace. If the competition offers something similar, service-based businesses can easily differentiate themselves by outgunning the competition in the area of service or by focusing on a niche in the marketplace.
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Do you look at competitor pricing before you set your own prices? If so, why? If not, why not? We welcome all questions on competitive pricing, as well as your tips and comments on this pricing topic.