How to Create a Competitive Pricing Strategy to Increase Profitability 🔊
A business can select from various pricing strategies based on several varying factors. A business can price to maximise profitability or to increase its market share. It can also set a price to fend off competitors, or merely to stay in the market. However, the most important thing that they should know is how to create a competitive pricing strategy.
Effective pricing is a big element that can make or break a business. And when it comes to developing marketing strategies, pricing is one of the most essential components. In fact, one of the first things that a shopper or customer notices about a product is the price. Most often, price is one of the contributing factors when it comes to customer’s buying decisions.
With the growth of e-commerce businesses and the convenient comparison-shopping digital platforms, competition in the market is real-time and has become more aggressive. Comparing prices online with that of the competitors is easier than ever before. Nowadays, customers are aware of the prices of products. Thus, companies should closely monitor their rival’s pricing strategy and set prices to have a competitive edge in the marketplace.
When setting prices, businesses should consider costs, price sensitivity, and competition. To sustain the business profitability, companies need to set a price tag that covers the cost of production, helps with the overhead costs of the company, and provides favourable profits.
A lot of competitors deliberately avoid using the various pricing models and strategies in favour of competitive pricing. However, implementing a pricing strategy that’s based on competitors’ behaviour is not a simple task.
So, in this article, we will discuss how to create a competitive pricing strategy and provide you with competitive pricing examples. We will also share with you the 3 competitive pricing options. In addition, we will give you insights on how to create a competitive pricing strategy to increase sales.
We believe that an effective pricing strategy would encourage customers to buy your products. Not only that but it would also optimise your margin and profit model. An effective pricing strategy also provides your company with an advantage over its rivals while increasing brand reputation and market share.
What is Competitive Pricing Strategy?
Competitive pricing is a pricing strategy where you consider the competitors’ prices when setting the price of similar products. Meaning, you use competitor prices as a benchmark to set the price tag of your product instead of setting the price based on value, demand or customer research.
Commonly, competitor-based pricing is used to test the pricing of the product, most especially if you’re new to the market. Instead of production costs and overheads, the focus of competitive pricing is on competition-driven prices.
Competitive pricing needs comprehensive research on what your competitors are offering and the prices of their products so you will arrive at your own pricing strategy. And to set the right price of the product, you need a detailed market analysis.
However, when you’re just beginning to get data, you’ll find there’s not enough clean, transactional data to analyse, let alone enough information to know for sure whether a new price point is really right for your customers or new products. That’s why competitor data – i.e., data that has been in the marketplace for quite some time – can help you set an initial price window for a particular market. Yes, it’s not going to be 100% accurate, but competitor data can help you to respond swiftly to your competition’s price action; and also contribute to the price-setting process for your goods and win more sales.
The 3 Competitive Pricing Options
After determining your product fit in the market, the next thing to do is to analyse how to price a product. There are three approaches on to how to price your product after doing a detailed evaluation of your competitors. You can either price your product lower, higher, or the same price as your competitors.
1. Price lower than the Competition
Pricing below the competitor’s price depends on the resources that a business has. This might be a good strategy if the company can improve the volume without greatly impacting the production cost. Setting a lower price will enable a business to compete with top brands and provide customers with a good reason to buy from them. However, make sure not to hurt the business’ bottom line when reducing prices.
2. Price higher than the Competition
On the other hand, if a business has superior products that stand out from its competitors, it’s okay to price higher than the competition. Of course, there should be a valid reason for pricing products at a premium price. For example, new product features and improvements can justify a higher price point.
A business can also differentiate its products from its competitors if it chooses to charge customers more for its products. They can do this through customisation/personalisation, bundling them with extra products/services, like special customer support, for instance.
Before deciding to price higher than the competition though, it is important that the business establish a good reputation being a provider of innovative and unique products. In other words, customers recognise the premium quality of your products and that they have the willingness to pay more.
3. Same Price with the Competition
A business can set the same price with the competition; however, the business has to make sure that it has a better offer. The product features might be the same, but the focus should be on added value. Consider other benefits that customers can take advantage of choosing your products.
Offer added value or benefits to customers such as extended warranty that can certainly give a business competitive advantage and help gain more market share. Remember, if nothing differentiates a company’s products from its rivals’ offerings, there’s a high probability of losing the business.
Competitive Pricing Examples
More efforts go into the process of setting the price based on competition. According to a recent survey, minor variations in prices can lower or raise profit margins by more than 20-25%. Thus, competitive price analysis is vital to competitive pricing strategies. To better understand the process on how to create a competitive pricing strategy, let’s take a look at some competitive pricing examples:
- Two companies sell laundry soap. Both businesses will try to keep their prices as close as possible and advertise their brand to stand out to the customers in terms of features and quality, to stay competitive with the other brand.
- Brand A dominates the shampoo market. Brand B wants to launch a new shampoo, so it analyses the market price and discovers that Brand A sells its shampoo at $10 per tube. Then, Brand B launches its product at $9.99 to give a psychological advantage to its pricing from its main rival, Brand A.
- A typical example of a competitive pricing strategy is between the famous soda brands Pepsi and Coca-Cola. Both companies are competing with each other on quality, pricing, and features. However, their prices remain the same, though Pepsi is a bit cheaper compared to Coke on average.
Many companies use competitive pricing strategy to make sure their customers stay with them and not go to their competitor because of their low costs. Mostly, benchmarking tools and competitor intelligence are the major decision-making resources for identifying competitive prices. With this type of pricing tools, businesses can optimise their prices almost real-time and maintain profitable margins. Not only that but also have a competitive edge over their competition.
How to create a competitive pricing strategy to increase sales
Some businesses experiencing a decrease in demand turn to excessive discounting to get rid of the dead stock. However, deep discounting does not always increase profitability, but quite the reverse. It can even impact demand in the long run and wipe out incremental EBIT growth.
Thus, we are providing some step below on how to create a competitive pricing strategy to ensure more profitable sales.
It’s important to know who your competitors are to determine their products and also the price that you will be benchmarking on. Then collect pricing data. Remember, it’s a continuous process and not a one-time task.
The majority of e-commerce stores have several competitors; thus, it may take time to collect and record data manually. However, you can automate the process by hiring a professional developer or a web scraping service provider create an in-house pricing engine. But remember that software needs maintenance, which should cost your business too.
Use competitor pricing data
After gathering competitor prices, you can now decide on your price positioning. You can either utilise low pricing, high pricing or the same price as the competitors (as discussed above on the 3 Competitive Pricing Options).
Take note, you can use pricing for different purposes depending on your marketing strategy. At this point, where you’ve identified your target price positioning, automation is important. Pricing software is not only a time-saver but it lets you set smart pricing rules according to cost, market prices, and target profit margin.
Either way (manually or with automation), ensure that you’re not staying on the same price for a very long time where the market conditions are always unpredictable.
Analyse historical pricing data
Finally, it’s time to analyse historical data. After a few months from tracking your competitors, you’ll observe some competitor behaviour patterns, such as:
- when competitors increase and reduce the price
- the kind of promotional campaigns they use;
- the type/brand/category of products they provide a discount on;
- amount of discount that they offer.
Based on your findings, create counter-strategies. For instance, if you won’t be able to match the cheapest rival because of their cost advantage, look for other popular products that they are not focusing on. Though demand is lesser, for sure, you can attract more customers because competition will be fewer.
Now that you have the information of the competitors’ discount campaign, it’s time to build your pricing in line with the historical data that you gathered so that you will not be surprised the next time.
- Pricing is an essential element of the whole marketing strategy; therefore, you need to select the perfect price for your product/service. Keeping the prices very close to your competitors’ price reduces the risks but also decreases the profits.
- Raise the prices of your products if you know that your product is of higher quality compared to your competitor’s offering. A competitive pricing strategy is one of the best approaches to determining the ideal prices for your products/services. Therefore, utilise it to your business advantage.
- Competitive pricing strategy is a must-have technique to get an edge from the competition in the fast-paced e-commerce business. Implement it to get new customers, increase sales, and also improve profitability.
Selling a distinguished product at the same price as the competitors’ is the retailers’ choice that wants customers to their business. But keeping customers or making them loyal usually means a business has to differentiate itself on other factors aside from price.
Your competitors’ behaviours play a big role in determining prices. With a competitive pricing strategy, a business can determine the best prices. Prices that are rationally within the market context where your business is and improve your profit margins.
The effectiveness or efficiency of a pricing strategy depends on its potential to maximize the revenue or profitability. While offering a wide variety of good quality products/services improves a brands’ image, an effective pricing strategy largely affect the market share. And also the customer loyalty of a brand.
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