Competitive Pricing

From CEOpedia | Management online

Competitive pricing is a strategy of selecting price level relatively to how much competitors are charging. This method is most commonly used at large markets, where many similar products and services are available. Process of choosing price level is crucial for each company because it has influence on their final return as well as company image and position on market. In order to gain market share, business owner may decide to lower the prices at cost of temporary loss. In the contrary, to create prestigious image they would need to set prices higher and provide better quality. Setting competitive prices requires constant market observation and proactive responses with following main objects: maximized profits and customers satisfaction. Selecting price based on competition may help skip long process of adjusting prices to customers expectations, however it has some disadvantages. There is no access to competitor's sensitive data, therefore same price level at different conditions such as less efficient production or smaller scale, may lead to company loss. Moreover, strong price orientation can result in price war and decreased profit margins (Toni, Sperandio Milan, Busata Saciloto, Larentis, 20017).

There are two types of market participants: price-takers and price-makers. Company which is able to exert pressure on the market and for example, by changing minimum price is called price-maker. Less influential producers (price-takers) have to adjust to changes. They continue to offer products and services as long as minimum price is above marginal cost of production. Some firms may be forced to leave the market due to lack of profitability (Borenstein, 2000). Companies which rely on competition based pricing strategy must be ready to adjust quickly and often cut costs below level of their competitors in order to success. However, treating pricing as a main marketing strategy is extremely unstable. Cost advantage should be combined with other promotional actions (Fratto, Jones, Nancy, 2006). Effectives of this strategy depends on size of the market. The bigger competition is, the more aggressive it might become. Demand is another important factor in the process of matching prices (Dufwenberg, Gneezy, 2000).

Examples of Competitive Pricing

  • Price Matching - Price matching is a type of competitive pricing where a retailer agrees to match the price of a competitor’s product. This strategy is often used to attract customers who are price conscious and to keep them from shopping at other stores. For example, Amazon frequently price matches its products to those of competitors, such as Walmart and Target, to ensure that customers are getting the best deal.
  • Price Skimming - Price skimming is a type of pricing strategy in which a business sets a high price for a product when it initially launches and slowly lowers the price over time. This strategy is used to capitalize on customers who are willing to pay a premium for the newest and most advanced product. For example, Apple often uses price skimming when introducing a new product. It will set a high price for the newest iPhone model and then gradually lower the price as newer models are released.
  • Price Discrimination - Price discrimination is a pricing strategy in which businesses charge different prices for the same product based on the customer’s willingness to pay. This strategy is often used by businesses to maximize profits by charging different prices to different segments of the market. For example, airlines often use price discrimination when selling tickets. They will charge higher prices to those who book their tickets closer to the date of travel, as they are more likely to be willing to pay a higher price.

Advantages of Competitive Pricing

Competitive pricing is an effective strategy for businesses to remain competitive in the market. The strategy has several advantages, including:

  • Increased market share - Setting competitive prices allows companies to capture more market share by offering lower prices than their competitors. This reduces the need to invest heavily in marketing efforts, and can provide a competitive edge in the market.
  • Increased customer loyalty - Customers are more likely to remain loyal to a company that offers competitive prices and good quality products. Competitive pricing can also help to build customer trust, which can lead to long-term relationships.
  • Improved profitability - When companies offer competitive prices, they can reduce their costs while still maintaining their profit margins. This can lead to improved profitability over time.
  • Reduced risk - Companies that offer competitive prices are less likely to be affected by economic downturns than those that do not. This reduces the risk associated with operating in a volatile market.

Limitations of Competitive Pricing

One of the main limitations of competitive pricing is that it can be difficult to maintain the competitive edge. This is because competitive pricing involves setting prices at or near those of competitors, and the competitive landscape can change quickly. Below are some of the limitations of competitive pricing:

  • Competitive pricing does not always guarantee increased profits. Since competitors can quickly change their pricing strategies, companies may have difficulty maintaining their competitive edge.
  • Competitive pricing can lead to price wars, which can cause companies to lower prices to unsustainable levels and lead to reduced profit margins.
  • It can be difficult to accurately assess the pricing strategies of competitors, as pricing data is often not publicly available.
  • Competitive pricing can lead to commoditization, as customers focus more on price than product quality, leading to a decrease in customer loyalty.
  • It can be difficult to differentiate products in a competitive pricing environment, as competitors may also offer similar products or services at the same price.

Other approaches related to Competitive Pricing

In addition to competitive pricing, there are other approaches related to pricing strategy:

  • Cost-plus Pricing - is setting the price based on the cost of production plus desired profit margin. This approach is used when company wants to achieve certain level of profitability and is not too concerned about competition.
  • Value-based Pricing - is setting the price based on the value customers perceive in the product or service. This method is used when company wants to emphasize its product uniqueness and is not too focused on the cost.
  • Penetration Pricing - is setting the price lower than the competition in order to attract more customers and increase market share. This method is used when company wants to gain market share and is not too concerned about short-term profitability.
  • Skimming Pricing - is setting the price higher than the competition in order to target high-end consumers. This method is used when company wants to target market segment that is willing to pay higher price and is not too focused on competition.

These approaches represent some of the strategies for setting prices in the market. In order to maximize the profits and create competitive advantage, the pricing strategy should be carefully designed and adjusted to the market conditions.


Competitive Pricing — recommended articles
Pricing strategy — Preventive pricing strategy — Skimming pricing strategy — Product line pricing — Competitive product — Imitator strategy — Market maturity — Price and non-price competition — Aggressiveness strategy

References

Author: Klaudia Szwajkosz

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