How to Implement a Successful Competitive Pricing Strategy For Your Business

Nobody likes to endure the pain of losing clients to competitors. Yet, it’s a common scenario most business owners have experienced. You invest your time and resources in nurturing a relationship only for the prospect to back out at the last minute. Why? Because they got a better deal elsewhere.

While several factors are responsible for this setback, it’s no secret that pricing significantly influences consumer buying decisions.

This is why some business owners think of competitive pricing as the best pricing strategy—and they choose it to avoid losing potential clients to lower-priced competitors.

Are you wondering whether it’s the right pricing model for your business?

In this article, you’ll learn everything about the competitive pricing strategy, including its benefits, and factors to consider when adopting it for your agency. 

What is a competitive pricing strategy?

A competitive pricing strategy is a pricing model where a business sets its prices to align with what competitors charge for similar products or services.

This pricing strategy focuses only on adopting competitors’ prices without considering profit margins, production costs, or rent. The goal is to make your prices more attractive to customers and gain market share.

Why choose a competitive pricing strategy?

Here are several reasons businesses choose competitive pricing as their preferred pricing method.

1. Pricing structure is easy to implement

Setting prices for your products can be tricky, especially if you are new in the industry. But by performing a competitive price analysis, you can easily set a price range while focusing on marketing and other important activities.

Also, this pricing model is considered low-risk because your competitors have most likely done their homework before setting prices. If it works for them, chances are high that it will work for you.

2. Adjust change prices in real-time

Competitive pricing allows businesses to respond quickly to changes in the market, such as price fluctuations and new entrants. You can promptly adjust your prices by aligning with competitors to avoid losing customers or reducing profit margins.

3. Attract price-sensitive customers

Technology has made it easy for today’s consumers to compare prices with a few clicks. That’s why they are becoming more price-sensitive and less loyal to brands, as they are always hunting for the best deals.

87% of shoppers say knowing they got a good deal is important to them when deciding which brand or retailer to buy from, according to a global retail study. Even at the decision stage of the buyer’s journey, consumers are likely to jump ship when they get a better offer. As such, using competitive pricing will win customers who prioritize price when making a buying decision. 

4. Easy to combine with other pricing strategies

By combining this model with another pricing strategy, you can create a pricing structure that is attractive to potential clients and profitable for you.

For instance, assuming you already implement project-based pricing or fixed-cost pricing for your business. You can research your competitors to know what they charge for similar projects and adjust prices based on your findings. This way, you’re not leaving money on the table by undervaluing your services.

5. Encourages healthy competition

Another pro of competitor-based pricing is the healthy rivalry it encourages. Companies are always on their toes to offer better services and top-notch customer experience.

Some common examples include Uber vs Lyft, Pepsi vs Coke, and Burger King vs McDonald’s. These companies are always in competition with each other to offer the best deals to their customers.

Who uses competitive pricing strategy?

Businesses that sell the same or highly similar products in the same industry use competitor prices to attract customers, increase market share, and remain competitive. Some examples include:

• Hospitality industry: Hotels, restaurants, and airlines often monitor their competitors and adjust their prices to attract more customers.

• Retail industry: both online and offline retail businesses set prices that match their competitors to attract customers who are always looking out for the best deals.

• E-commerce industry: E-commerce merchants understand first-hand how highly competitive it can be. As such, they offer competitive prices to attract customers, especially in niches with many competitors.

• Manufacturing industry: manufacturers aren’t left out as they adjust their prices in response to average market value or competitor’s price.

Types of competitive pricing strategies

Here are five types of competitive pricing strategies businesses can adopt.

Price skimming

This competitor-based pricing strategy is best when entering a market where there’s little or no competition. You set an initial high price for a product to maximize profits before competitors enter the market. This is called a first-mover advantage.

Then you gradually reduce the price as competitors flood the market to keep existing customers, attract new audiences, and remain profitable.

Penetration pricing

What do you do when you don’t have a first-mover advantage? You set a price lower than the average market price to get a foothold, attract price-sensitive customers and increase market share—this is called penetration pricing. 

For example, if the current market price for a SaaS tool is $100, you can break into the market by setting your price at $85. Then gradually increase the cost over time as you grow your brand reputation to become profitable. With SaaS tools, it’s also popular to offer lifetime deals for a limited amount of customers, then switch to a recurring billing pricing strategy.

One disadvantage of penetration pricing is the losses you’d have to bear when selling lower than the average market price.

Loss-leader pricing

This strategy requires you to sell products or services at a loss or significantly reduced price to entice customers. The aim is to make up for the lower price with increased sales volume.

Loss-leader pricing also helps to drive traffic to your store and boost sales of other products sold at a higher profit margin. This way, you can break even.

Premium pricing

This entails setting higher prices than your closest competitors. Doing this helps your brand stand out and position your business as a luxury brand. However, you won’t attract price-sensitive customers with this strategy.

Price matching

As the name implies, price matching means matching the prices of your competitors. It’s effective, especially in industries where price is a major factor in the purchasing decision.

However, to stand out from your competitors, make the consumer buying experience memorable. Do this by adding extra value such as a money-back guarantee, discount offers, freebies, excellent customer service, and after-sales support. This way, potential clients are more likely to choose your business over others.

Factors to consider when adopting a competitive pricing strategy

Competitive pricing may sound like the perfect strategy. Set the same price as my competitors and call it a day. But it doesn’t always work that way. 

To ensure you’re not losing money or customers, there are some factors to consider before adopting a competitive pricing model. Let’s take a look at some of them.

Production costs

Let’s assume it costs your competitors $100 to manufacture a product and they price it at $150. Setting your price at $140 might seem like a good idea to undercut them.

However, this will only make sense if your production costs are lower than $100. If it’s more, you’ll struggle to become profitable and may have to sell a bigger volume to break even. As such, it’s essential to factor in your production costs before setting similar prices to your competitors. 

Profit margins

While it is essential to stay competitive, ensure your business is profitable. After all, that’s the goal of every business. Before adopting your competitor’s prices, calculate your margins to determine the profit necessary to keep the company afloat. 

Target audience

Price isn’t the only thing customers look out for when making a buying decision. Other factors like quality, brand reputation, social proof, and convenience also play a significant role.

Before pricing your products to align with your competitors, understand your target audience’s buying behavior and find out what they value the most. A client who appreciates quality over price will have no problem choosing your business if you offer better quality.

Brand image & positioning

Brand image plays a crucial part in any business. You risk losing customers or harming your business if you set prices that don’t match your brand image.

For instance, running a luxury business while adopting prices similar to low-budget or mid-range brands won’t help to maintain a premium status. Also, customers will assume you’ve reduced the quality of your product or service since prices are lower. Therefore, they would no longer want to be associated with your brand.

But if you want a share of the mass market, you can sell lesser-priced products that cater to that audience. This will help to attract customers at all price points without diluting your brand.

Long-term goals

Starting a business is the easy part. The hard part is maintaining it over time. As such, when implementing competitive pricing for your business, it’s important to factor in your long-term goals.

Competitive pricing may boost sales in the short-term but is it sustainable in the long run? It’s in your best interest to consider how this strategy fits in with your long-term objectives. How will it affect your profitability, market share, customer base, and overall business growth?

By keeping all the aforementioned factors in mind, you can select the right competitive pricing strategy that works for your business, attract customers, make a profit, and meet your long-term goals.

Best practices for implementing a competitive pricing strategy

If you eventually decide to adopt a competitive pricing strategy for your business, here are some best practices to ensure you remain profitable.

1. Regularly monitor the market to ensure your prices remain competitive. You can make use of automation tools to manage the price monitoring process.

2. Review and adjust your pricing accordingly to ensure it aligns with your business goals and changing market conditions.

3. Stay updated with industry trends and pricing data in consumer behavior to avoid being caught unaware in case of sudden price changes.

4. Be flexible and willing to experiment with competitive pricing strategies to determine which works best for your business and target audience.

5. Consider non-price factors in your product positioning and marketing strategy such as quality, convenience, customer service, and brand reputation.

Does the competitive pricing strategy work for agencies?

As I’ve established throughout this article, competitor-based pricing is great for businesses that want to attract and retain price-sensitive customers. But will it serve you as an agency owner?

The truth is, there’s no harm in researching your competitors to know what they charge for similar services. However, it may not be the best pricing method for agencies that run service-based businesses because clients are often more interested in quality, expertise, and results, rather than the lowest price.

But if you have good automation and processes in place, you can underprice competitors and offer the same quality without affecting your profit margins.

Take Harry Strick, founder and CEO of Ranked.ai for example. He uses automation to streamline his processes without affecting quality.

Overall, the decision to use a competitive pricing strategy for agencies depends on the specific industry and target audience. Carefully consider all factors before adopting this pricing model to ensure they remain profitable without compromising quality.

Wrapping it up

A competitor-based pricing strategy is a powerful tool for businesses looking to attract and retain customers, increase sales, and gain market share in a highly competitive market. 

By researching your competitors, and adjusting your prices you can position your business for long-term success.