Key Takeaways
- Competitive pricing pros and cons: Weigh the benefits of protecting market share and staying competitive against margin pressure and brand risks.
- Price against the market strategically: Pricing above, below, or in line with competitors each serves a different business objective.
- Protect value, not just volume: Use customer insights, segmentation and pricing analysis to avoid competing on price alone.
- Build pricing capability: Strong pricing teams and cross-functional alignment help businesses make better pricing decisions and protect profitability.
There are many pricing strategies businesses can use to compete, but competitor prices should not determine your pricing strategy. Competitive pricing works best when competitor prices inform your decisions alongside customer value, willingness to pay, and market conditions. In this article, we’ll explore the pros and cons of competitive pricing and when businesses should follow the market or look beyond it.
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Table of Contents:
I. Competitive Pricing Pros and Cons: When Is It Right For You?
II. How To Set The Most Competitive Price For Innovative Tech Products
III. Analysis of the Trend of Competitive Pricing Methods in the Airline Industry
See whether your pricing is under control
Competitive Pricing Pros and Cons: When Is It Right For You?
Pricing strategies play an important role in the success of your product or service. A well-chosen and properly implemented strategy can maximise profits and align your positioning with customer perceptions.
Competitive pricing is one such strategy that your business can choose to employ. This is particularly relevant for businesses selling similar products or services in markets where customers can easily compare competing offers.
In these markets, customers often have several alternatives and can compare prices easily. Competitive pricing can therefore help businesses assess their market position and decide how closely their prices should align with competitors.
If you’re unsure whether this approach is right for your business, continue reading. We’ll define exactly what this strategy means and how it works, and take a look at the pros and cons of competitive pricing.
Competitive Pricing Pros and Cons: Key Benefits and Risks
Competitive pricing can work well in markets where customers can easily compare similar products or services. The main benefits include:
- Protecting market share: It can help prevent customers from moving to competitors and keep your business positioned in the market.
- Staying responsive: Tracking competitor prices helps your business respond to market changes and identify opportunities to test pricing changes.
- Flexibility: Competitive pricing can be modified or combined with other pricing strategies to suit your business needs.
The main risks are:
- Margin pressure: Focusing too heavily on competitors can lead to prices being cut too far and margins being squeezed.
- Brand and loyalty risks: Poorly applied pricing can harm customer loyalty and brand value.
- Resource demands: Continuously analysing the market can require significant resources, which may be difficult for smaller businesses.
Whether these trade-offs make competitive pricing suitable for your business depends on your market, customers, and available resources. To assess whether it is the right approach, first understand what competitive pricing means and how it works.
What Is A Competitive Pricing Strategy?
Competitive pricing involves using competitors’ prices as a reference when positioning your own. This market-oriented approach requires businesses to monitor competitor prices, market conditions, and customer expectations.
Competitive pricing is particularly relevant in high-competition environments where customers are sensitive to differences between competing offers. Businesses need to monitor market movements and customer responses when deciding whether to change their prices.
Introduction to Price Optimisation 💰 Podcast Ep. 74!
How Does It Work?
With this pricing strategy, businesses have three options:
- Price in line with competitors
- Price above competitors
- Price below competitors
Choosing the right approach requires a clear understanding of customer perceptions, your value proposition, and your market position.
Pricing In Line With Competitors
Setting prices in line with competitors allows businesses to remain close to prevailing market prices while differentiating through their brand, service, product features, or customer experience. However, matching competitors too closely can limit pricing flexibility and make it harder to capture additional value.
Businesses can also use price matching to position themselves as a credible alternative. However, matching competitors should support a broader value proposition rather than become the sole reason customers choose your business.
Pricing Above the Market
Pricing above competitors can reflect stronger brand equity, differentiated features, better service, convenience, scarcity, or higher perceived value. The higher price needs to be supported by a value proposition that customers recognise and are willing to pay for. This may also require you to add features or services that strengthen the value of your offering. This can increase customers’ perceived value.
Pricing Below the Market
Pricing below competitors can attract price-sensitive customers, increase traffic, or support market-share growth. However, lower prices do not guarantee repeat purchases and can put pressure on margins if customers are primarily responding to price.
A loss leader is one specific form of below-market pricing, where a product is deliberately priced at or below cost to attract customers who may purchase other profitable products. Other below-market tactics may instead involve discounts, bundles, or targeted promotions without selling below cost. Another advantage is that it can help move stagnant inventory.
Competitive Pricing Pros and Cons
Competitive pricing can protect market share and improve market awareness, but it can also create margin pressure and weaken differentiation. The key benefits and risks are:
See how pricing breaks in practicePros
Competitive pricing can help businesses monitor market movements, protect market share, and respond to changes in competitor behaviour. This strategy can help prevent customers from switching to competitors and protect market share.
Pricing is an important factor in many customers’ buying decisions, and digital channels make it easier for customers to compare prices across competing offers.
A common misconception is that competitive pricing is all about slashing prices to beat other businesses. Monitoring competitor prices can also reveal opportunities to test higher prices. If competitors raise their prices while your customer value proposition remains strong, you may have room to improve margins without losing demand.
Competitive pricing helps businesses remain responsive to changing market conditions without relying solely on price to demonstrate value.
Likewise, competitive pricing strategies can be modified and combined with other strategies. By tailoring your approach, you can fine-tune pricing to suit your business needs.
Cons
With any strategy, there is a risk of poor implementation. The biggest risk is competitor anchoring. Businesses can become so focused on competitor prices that they start using the market as their primary reference point rather than considering customer value and willingness to pay. This can lead to unnecessary price cuts and margin erosion. Businesses should also consider overhead and production costs.
As we’ve mentioned above, not all strategies are suited to every business. You’ll want to assess whether competitive pricing is appropriate for your business. Otherwise, you can risk harming customer loyalty, brand value, and good business operations. In these cases, you may benefit more by combining different strategies. Smaller businesses may also lose out on this strategy since it takes a lot of resources to continuously analyse the market and sustain it.
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Conclusion: Competitive Pricing Pros and Cons
Competitive pricing can help businesses protect market share and respond to changing market conditions. However, the strategy works best when competitor prices inform decisions rather than determine them. If your business is struggling to navigate competitive pricing, a specialised pricing team can help.
See whether your pricing is under control
How To Set The Most Competitive Price For Innovative Tech Products ✨
Innovative products show why competitor pricing cannot always be the starting point. When there are few direct substitutes, businesses need to understand customer value, willingness to pay, and the benefits their product provides. Competitor prices can still provide useful context, but they should not determine the price.
Competitive Pricing Pros And Cons: When Competitor Prices Aren’t Enough
Pricing is difficult enough, but it becomes even more challenging for new and innovative products. A large part of this difficulty comes from customers being unfamiliar with the value of the product.
Many products, especially those in tech, are priced based on the customer’s perception of how much they are worth. In fact, some pricing strategies, such as value-based pricing, are built around this concept.
Whether or not you adopt value-based pricing, perceived value plays a large role in the success of your strategy. Your business needs to understand how to maximise value and what pricing challenges you can expect. This will give you a better foundation for building your pricing strategy.
Pricing Challenges
The challenge is not simply finding a price that is neither too high nor too low. It is understanding customer value, willingness to pay, and which pricing model best captures that value. Pricing too low can erode your margins and raise questions about the quality of your product. Meanwhile, pricing too high can put off customers and drive them towards cheaper alternatives.
Likewise, mispriced technologies, especially new ones, can disrupt customer perceptions, supply chains and broader market dynamics. For example, low-priced breakthrough technologies can stunt profits for the entire industry and create highly sensitive and competitive environments. This can leave companies with little room to improve margins.
However, a clearer understanding of customer value can help businesses manage these challenges more effectively.
Determining The Value Of Your Product
Determining the value of your product can be a complex task.
Sampling Prototypes
The first step is to have a specific group of people sample your product, particularly early adopters. These people are typically those who are forward-thinking and are interested in cutting-edge technology. Because early adopters are more likely to understand and engage with new technology, their feedback can provide useful insights into perceived value, product benefits, and willingness to pay.
How Many Pricing Analysts Do you Really Need? 👩💼 Podcast Ep. 40!
Interviews
Alongside product sampling, conduct interviews with customers. These interviews can help you understand which features customers value, what concerns may prevent adoption, and how they perceive the product’s value.
At this point, you must address any concerns around user-friendliness. One of the most common barriers to adoption is frustration with learning how to use new technology.
Refining Your Product
Now that you have open feedback channels for your new release, make the necessary tweaks to refine your product. During this stage, identify which aspects of your product stand out most to customers and use these strengths in your marketing.
Pricing Strategy
After measuring and testing your product, you should have a clearer understanding of its value. At this point, you can determine which pricing strategy best suits your offering.
Depending on your product and market, some pricing strategies may be better suited to maximising profitability than others. It’s critical that you choose the best strategy for your business. A competent pricing team with specialised expertise can help you navigate this process.
Competitive Pricing Pros and Cons: Pricing Considerations for Innovative Products
As you begin the process of pricing your new tech offering, there are several aspects that you’ll want to consider. These considerations will help you develop a pricing strategy and revenue model that works for your business.
What and When Are You Pricing?
The first consideration is the structure of your pricing strategy. This consideration is especially important for new technologies that may not fit into previously used pricing models. What may have worked for you before may no longer be compatible.
A good example is SaaS, or software as a service. Cloud-based products such as Google Workspace and Dropbox show why businesses need to consider what they are pricing and how customers pay. SaaS shifted many software products from one-time licences towards subscription-based models, allowing providers to monetise ongoing access and recurring value.
In this case, the change involved both what customers pay for, from a product to an ongoing service, and how they pay, from a one-time upfront payment to a recurring subscription.
Competitive Pricing Pros and Cons: Choosing the Right Pricing Model
The relationship you have with your customers can have major implications for your pricing and revenue strategy. Depending on your offering, you can utilise the relationship your clients have with your business to generate profit.
For example, a transactional purchase typically involves a one-time payment, while recurring or usage-based models charge customers for continued access or consumption. Depending on the offering, this could involve a subscription, usage-based, or pay-as-you-go model.
Value-Adding
Lastly, one aspect you may want to consider is value-adding. This can help protect margins when customer perceptions limit pricing flexibility. By adding extra services or special features, you can add perceived value to your offering.
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Conclusion on Competitive Pricing Pros and Cons and Setting The Most Competitive Price
In summary, pricing an innovative product requires more than benchmarking competitors. Businesses need to understand customer value, willingness to pay, and the pricing model that best captures the value they provide.
It’s important to review your pricing structures and make changes when existing methods no longer serve your business. Lastly, if your business is struggling to develop the right pricing approach, consider working with a specialised pricing team. Pricing professionals have specialised knowledge that can help you find the best method for your business.
See whether your pricing is under control
Analysis of the Trend of Competitive Pricing Methods in the Airline Industry 🛬
Changes in airline ticket prices can reflect shifts in competition, capacity, demand, and customer willingness to pay. Competitive pricing is one input into airline pricing decisions, but airlines also need to consider route economics, customer segments, and the value of different fare options.
Competitive pricing can also create challenges for airlines. Margin pressure can arise as lower fares reduce profitability and make it harder to cover costs and investment. Competitive pricing can also increase the risk of commoditisation, making it harder to differentiate the brand and protect customer loyalty. Therefore, understanding and navigating competitive pricing dynamics are essential for long-term success.
The airline industry provides a useful example of why competitor prices should inform pricing rather than determine it. Airlines combine competitor benchmarks with demand forecasting, segmentation, capacity, and customer value when setting fares.
Historical Evidence: How Competition Affected Airline Fares
Historical evidence from 2023 illustrates how increased competition and capacity can affect airline pricing.
Flight Centre Corporate’s analysis of the second half of 2023 found that international airfares fell by 13%. Economy class passengers benefited from an average saving of $280 per ticket compared to the previous year, while first-class and business class tickets experienced notable reductions, averaging around 8%, translating into potential savings of up to $1280.
The reduction was particularly pronounced on flights from Australia to Hong Kong, with a nearly 36% drop in economy ticket prices and almost 24% for business class. Similar fare reductions were reported for flights to New Zealand and Singapore. However, European flights experienced more modest decreases, with Flight Centre Corporate identifying Europe as the ‘last frontier’ for further fare reductions, emphasising the need for increased flights and competition.
How much should a CEO know about Pricing? 👨💼 Podcast Ep. 63!
Increased capacity can put downward pressure on fares when airlines add seats faster than demand grows. This illustrates why competitor prices alone do not explain airline pricing: capacity, demand, and route-level competition also influence fares.
Strategic pricing is essential as airlines navigate this competitive landscape. By carefully analysing market dynamics, leveraging expanded capacity, and remaining adaptable to changing demand patterns, airlines can position themselves for success amidst the evolving business landscape.
How Airlines Apply Competitive Pricing
Airlines can apply several pricing strategies to respond to changing demand and competitive conditions.
Dynamic Pricing Strategies
Real-time adjustments: Airlines use data analytics to continuously monitor changes in demand. By analysing booking trends, seat availability, demand, and competitor pricing, airlines can adjust fares as market conditions change. For example, if demand suddenly increases for a particular flight, airlines may raise ticket prices to maximise revenue.
Demand forecasting: Forecasting future demand is essential for airlines to anticipate market trends and adjust pricing accordingly. By utilising historical data, market trends, and predictive analytics, airlines can forecast demand for different routes and time periods. This enables them to optimise pricing decisions by adjusting fares in anticipation of changes in demand. For instance, airlines may lower prices during off-peak travel times to stimulate demand and fill empty seats.
Segmentation Tactics
Targeting different customer segments: Airlines segment their customers according to factors such as travel preferences, purchasing behaviour, and demographics. By understanding the distinct needs and preferences of different customer segments, airlines can tailor their pricing strategies to meet the specific requirements of each segment. For example, budget-conscious travellers may be more responsive to discounted fares, while business travellers may prioritise convenience and flexibility.
Value proposition alignment: Airlines should ensure their pricing reflects the perceived value of their offering for each customer segment. By aligning pricing with the value proposition of their services, airlines can justify their fares and maintain customer satisfaction. For instance, premium services such as priority boarding, extra legroom, and complimentary meals may command higher fares to customers who value these amenities.
Route-Specific Pricing
Route analysis: Airlines analyse each route to understand demand patterns, the competitive landscape, and operating costs. By evaluating factors such as passenger demand, competition from other airlines, and operating expenses, airlines can identify opportunities for pricing optimisation.
Pricing optimisation: Airlines use route-specific data to adjust fares, maximise revenue, and remain competitive. For example, airlines may face greater pricing pressure on highly competitive routes, while routes with strong demand and limited alternatives may provide greater pricing power. However, fares also depend on customer segments, willingness to pay, capacity, and the value of different fare options.
Competitive Pricing Pros and Cons: How Airlines Can Improve Their Pricing Decisions
Airlines need to balance competitive positioning with demand, capacity, customer willingness to pay, and margin objectives. This requires more than monitoring competitor fares.
Competitive benchmarking can help refine pricing strategies. By analysing competitor pricing tactics and positioning, airlines gain valuable insights into market dynamics. Understanding competitor fares helps airlines identify market trends and assess their own position. However, competitor prices should inform pricing decisions rather than determine them.
Learning from competitor promotions or fare structures can help airlines identify opportunities to test their own pricing tactics.
Promotional pricing can help drive sales and fill empty seats, particularly during off-peak periods. Airlines can implement targeted promotions to stimulate demand and incentivise travellers to book during low-demand seasons.
Strategic discounting on less popular routes or low-occupancy flights can help airlines fill capacity and improve revenue. By adjusting fares based on demand and route performance, airlines can optimise pricing decisions to drive profitability.
Communicating the value proposition clearly is another important part of effective pricing. By highlighting the benefits and unique features of their offerings, airlines can justify price differences and help customers understand the value of higher-priced fares.
Educating customers about the value they receive with higher-priced fares through targeted marketing campaigns and clear communication channels is essential. This helps customers understand the additional services, amenities, and conveniences included in higher-priced tickets, thereby justifying premium pricing.
Competitive Pricing Pros and Cons: Building Pricing Capability in Airlines
Strong pricing capability helps businesses balance competitive pressure with profitability. Pricing teams can combine market intelligence, customer insights, and analytics to make more informed pricing decisions.
Margin protection is a fundamental concern for airlines. Balancing competitiveness and profitability is essential, requiring fares to cover costs while remaining competitive in the market. Airlines must analyse costs and market dynamics carefully to strike the right balance.
Airlines must also protect revenue integrity. Airlines should avoid excessive discounts that may erode margins without driving sufficient demand, ensuring sustainable profitability in the long term.
Competitive Pricing Pros and Cons: Why Pricing Expertise Matters
Skilled pricing teams are essential because they bring expertise in revenue management and analytics needed to make informed pricing decisions. These teams play a vital role in optimising revenue and maximising profitability. Training and development can help pricing teams stay up to date with industry trends and best practices and build the skills they need.
With the right pricing team and processes in place, businesses can identify opportunities to improve pricing performance, protect margins and manage more complex commercial risks as pricing capabilities mature.
Businesses should also embed commercial capability across the organisation. Cross-functional collaboration is critical, as pricing decisions should be integrated with other departments such as marketing, sales, and operations. Cross-functional collaboration helps teams align their approach to pricing.
Additionally, organisational alignment is essential. Pricing strategies should align with the airline’s overall business objectives and customer value proposition. By ensuring organisational alignment, airlines can deliver consistent value to customers while maximising revenue and profitability.
When a business builds and embeds commercial capability across the organisation, stronger internal pricing skills can help protect revenue and volume while creating opportunities to improve margins. These improvements can strengthen profitability.
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Bottom Line: Competitive Pricing Pros and Cons
Competitive pricing can help businesses understand market expectations, protect market share, and respond to competitive changes. However, relying too heavily on competitor prices can create margin pressure and weaken differentiation.
The strongest pricing approach combines competitive intelligence with customer insights, segmentation, willingness-to-pay analysis, and a clear understanding of customer value. Whether pricing an established product, launching innovative technology or responding to airline competition, businesses should use competitor prices as an input, not as the strategy itself.
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