Pricing Demystified: The Competitive Pricing Strategy

One of the most confusing and mystifying aspects of opening a retail store or starting to sell products online is figuring out how to price products. There’s a lot to consider when it comes to pricing. Are customers willing to pay what I’m asking for? Am I charging too much? Am I not charging enough? Can I afford to discount my prices? How do my prices compare to those of the competition? 

We’re going to fill you in on a pricing strategy that centers around that last question. A competitive pricing strategy revolves around what your direct and indirect competitors are charging for comparable products and services.

In this guide to comparative pricing strategy, you’ll learn:

• What a Competitive pricing strategy is
• The pros and cons of a competitive pricing strategy
• Competitive pricing examples
• How to evaluate the success of a competition pricing strategy

What is a Competitive Pricing Strategy?

When you use a competitive pricing strategy (also known as a “competition pricing strategy”) to price your products, you set prices based on how much your competition is asking for similar products, rather than on internal factors like cost of goods sold or profit margin. 

This approach doesn’t always mean matching competitors’ prices or selling products for less than the competition. You can price your products higher than the competition when using this pricing strategy. Here’s a closer look at the three approaches to competitive pricing strategy:

• Set higher prices than the competition: When you sell comparable products for more than what your competitors are asking for them, you’re positioning your products as premium products. With this pricing strategy, you’ll attract customers who are drawn to quality (or perceived quality) over price.
• Price match the competition: When you sell similar or identical products for the same price as the competition, you’re positioning your products and brand as equivalent to the competition. Price matching is a good strategy when you want to attract customers and keep them away from the competition. When your prices are the same as competitors’ prices, it’s important to differentiate yourself in other ways, such as by offering free shipping, great customer service, or convenient hours.
• Set lower prices than the competition: Selling products for less than the competition can help you attract customers. Keep in mind, however, that you’ll most likely attract price-sensitive customers. To keep them from going to the competition, you’ll have to sustain low prices. 

A competitive pricing strategy is just one of many pricing approaches. Alternative strategies include:

• Value-based pricing is based on the perceived value of the product. This pricing tactic typically works better for services than for products.
• Cost-plus pricing, also known as markup pricing, incorporates the cost of goods sold plus a markup percentage, and is widespread in the retail world.
• Dynamic pricing involves constantly changing your prices by monitoring supply and demand. This is a popular pricing strategy for airlines.
• Price skimming means setting prices high initially, and gradually reducing them to increase your volume of customers. 
• Economy pricing involves setting prices lower than the competition in hopes of attracting a high volume of customers. Generic brands of consumer packaged goods commonly use this pricing approach.
• Penetration pricing means setting prices low initially to attract a large customer base, creating a loyal customer base, then raising prices to become profitable. This is the pricing strategy Uber and Lyft used to create a dependence on their services.

Pros and cons of implementing a competitive pricing strategy

Weigh the advantages and disadvantages of a competitive pricing strategy before implementing it as part of your retail business plan.

Pros of a competitive pricing strategy

Using a competitive pricing strategy is simple. Beyond doing some competitive research and deciding whether you want your prices to match, cost less, or cost more than the competition, there isn’t a ton of number crunching involved with this approach. 

When your prices are lower than or equal to competitors’ prices, you can attract new customers and steal customers away from the competition. While you may lose profit on some items, you could gain loyal customers who will continue to spend with you. In that respect, competitive pricing can act as a loss leader.

A competitive pricing strategy can help you position your products and business relative to the competition. For example, if your prices are much higher than competitors’, then your perceived value will be higher than theirs and attract customers who look for quality instead of price. If your prices are lower, your perceived value will be lower and you’ll attract customers who seek price over quality.

Cons of a competitive pricing strategy

When competitive pricing strategy is used for price matching and to offer prices lower than that of the competition, you can end up in a race to the bottom in which both you and your competitors reduce prices to beat each other. Ultimately, you may not be profitable and your business could go under.

This take on competitive pricing strategy also tends to attract price-sensitive customers. You’ll have to work harder to gain the loyalty of this audience, as they tend to shop wherever they can get the best deal.

Finally, if you only base prices on the competition and not on your company’s finances (such as what it costs to manufacture or buy the products in question), your business may not be profitable enough to operate long term.

Examples of competitive pricing

Here are several real-world competitive pricing examples to help you better understand this approach. 

Example of higher competitive pricing: Lululemon

Before Lululemon penetrated the market, it was difficult to imagine anyone but a professional athlete willing to spend more than $100 on a pair of leggings. By charging much, much more for its workout apparel than the competition, Lululemon elevated gym clothes from something people only wore to the gym to a stylish status symbol. Lululemon used a competitive pricing strategy to pioneer athleisure and become the go-to for premium workout and lifestyle apparel.

Example of equal competitive pricing: Best Buy

From Amazon to big box stores and independent electronics stores, Best Buy has a lot of competition. By offering a Price Match Guarantee, Best Buy reduces its prices to match competitors’ prices if they offer a better deal on an identical item. This price match policy applies to both online and in-store purchases. By doing so, Best Buy can keep loyal customers from taking their business to the competition.

Example of lower competitive pricing: Quince

Quince is an ecommerce retailer that sells “high quality essentials” for “radically low prices.” The brand’s marketing strategy is centered around the fact that it cuts out the middleman and charges less than the competition for luxury products such as leather bags, fine jewelry, and silk bedding. 

Quince has positioned itself as the attainable source for the finer things in life. One of the ways it does this is by placing its prices next to “traditional retail” prices on its product pages to make you feel like you’re getting a good deal. For example, Quince charges $149 for a genuine leather jacket. On the jacket’s product page, you can see competitors’ prices: $489 at AllSaints, $895 at Maje, and $995 at Rag & Bone.

How to evaluate the success of a competition pricing strategy

As with anything else in business, it’s important to evaluate how well a competitive pricing strategy is working for you. Point-of-sale (POS) system reports can give you insights in real time. Monitor these key performance indicators through your retail POS on a regular basis:

• • Sales volume: How does competitive pricing affect sales? Has lowering prices made more people buy products? Are your sales growing month over month, year over year? If yes, a competitive pricing strategy may be working for you.
  • Profit margins: Even if you’re not basing prices on profit margins, you should still keep an eye on them to make sure your business can stay afloat. First, look at profit margins for individual products. Then, inspect your business’ overall profit margins. If you’re using a loss leader strategy, it’s okay to not earn a profit on certain products as long as your business is profitable on the whole.

• Customer lifetime value: If you’re lowering prices to beat the competition, you could be attracting cost-sensitive customers who are only looking to get a good deal and who won’t return to your store if someone offers them a better price. Customer lifetime value can help you determine customer loyalty and understand if a competitive pricing strategy is working for or against your business.

Wrapping up: Competitive pricing strategy demystified

Figuring out how much to charge for products is one of the biggest challenges retailers face. There are so many factors to consider: what competitors are asking for, what customers are willing to pay, what kind of a profit you can earn… the list goes on and on.

A competitive pricing strategy is one approach that involves setting prices based on the competition. You can choose to charge more, less, or the same for similar or equivalent items to attract a certain kind of clientele. No matter how you determine your prices, it’s important to evaluate your strategy’s success. Refer to your POS system’s reports to understand how well your pricing tactics are working for you. Watch a demo of Lightspeed POS today.