When two products or services have similar core features, but are produced by different companies, competition results.A competition-based pricing strategy involves setting your prices based on your competitors’ prices rather than on your own costs and profit objectives. If there is a close gap between costs and the actual selling price then there is going to be an even greater competition on price.
In a perfect world there would always be a larger margin between costs and selling price to comfortably increase your profits – but, stop press, it's not a perfect world!
So, how do you price a product so that you don't scare off potential customers with too high a price but you manage to cover all your costs and make a profit – and gain a competitive advantage along the way?
Well, some of it depends on the market in which you are trying to sell but the best way to gain market share in a competitive market is not always to be the cheapest. The caveat is that you must be able to prove you are the best to justify a higher price by developing the right corporate image, positioning strategies – and stressing the value or quality of your product.
If you are new to a market – or with a new product to sell, it's a common strategy to start with a low introductory price to get yourself known. A low price should attract sales and can help your business reach greater profits more quickly.
If a product has network effects - if it becomes more valuable the more people use it - then a low price helps your business set the standard. On the other hand, a high initial price can enhance the positioning of a product as a unique or luxury item.
Any business, big or small, can set its prices as it deems appropriate – this is fine - but setting prices low in order to force a competitor out of business is not, and could be illegal.
Instead of fighting over the same market, competitors sometimes focus on different consumers who want similar products.
How to Price a Product – and what to consider
1. Price Environment
Your price environment determines the level of control you have over competitive pricing. Price environments are either market-controlled, company-controlled or government controlled. A market-controlled environment shows a higher level of competition with similar products and little price control by individual companies.
A company-controlled environment shows moderate competition because of unique goods and services, and a lot of price control by individual firms. In a government-controlled environment, the government takes input from related companies and then determines prices.
2. Competitive Product
Competitive pricing relies on three product styles: lasting distinctiveness, low cross elasticity and perishable distinctiveness. Products with lasting distinctiveness are ones that will always stand out from the crowd, such as pharmaceuticals protected by patent laws. Low cross elasticity means the demand for the product will rise, such as with a software upgrade.
Products with perishable distinctiveness are unique in the beginning, but fall to medium distinctiveness after a period of time and would include popular technology products.
3. Price Range
Every product has a price range. To decide where you fit on the current price range of your competitors or if you should choose something outside it, compare your product to those of your competitors. Customers use the existing prices as a guide to what is normal or considered a good deal, so be prepared to handle the consequences of pricing outside the standard range by selling value.
4. Target Market
Consider adapting products to suit the needs of particular customer groups. This might involve offering economy, standard and premium versions. This market segmentation approach can build loyalty and see customers progress to higher price points as their circumstances and needs change. Offer a free warranty or after-care service to differentiate yourself from the competition.
5. General Strategies
Your price relationship to your competitor falls into one of four categories These are pure parity, dynamic parity, premium pricing strategy or discount pricing strategy.
With pure parity, your price always equals that of your competitor: they set the price and you match it.
Dynamic parity happens when you pick a competitor and keep the gap between their price and yours the same.
Premium pricing is pricing higher than the competitors, but you gain a position of higher perceived benefits.
With discount pricing, you always keep the price cheaper than competitors. Discount pricing is most commonly used by generic or store brands.
6. Pricing Intelligence Software
Pricing intelligence tools help you gain pricing insights, identify comparative price distributions and trends, your competitors’ terms of sale, pricing policies and how they differentiate their products from yours. Pricing intelligence information is current and available 24/7 to help you make critical, strategic short-term decisions, while also fulfilling long-term goals.
Achieving Pricing Success
A key component to pricing your product right is to continuously monitor your prices and those of your competitors. In order to remain competitive you owe it to yourself and to your business to be relentless in managing your prices. Remember, how you set the price of the products in relation to your competitors could be the difference between the success - or failure - of your business.
Marketing: Concepts and Strategies, Lyndon Simkin and Sally Dibb 2016
The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016
Pricing Strategy: tactics and strategies for pricing with confidence, Warren D. Hamilton 2014
Pricing for Profit:how to develop a powerful pricing strategy for your business, Peter Hill 2013
Value-based pricing: Drive sales and boost your bottom line by creating, communicating and capturing customer value, Harry Macdivitt and Mike Wilkinson, 2011