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).
- Borenstein S. (2000) Understanding Competitive Pricing and Market Power in Wholesale Electricity Markets Elsevier Science Inc., 1040-6190/00/$–see front matter PII S1040-6190(00)00124-X
- Dufwenberg M. Gneezy U . (2000) Price competition and market concentration: an experimental study International Journal of Industrial Organization 18, 7–22
- Fratto M. Jones G. & R. Nancy M & C. (2006). An investigation of competitive pricing among apparel retailers and brands. Journal of Fashion Marketing and Management. 10. 387-404. 10.1108/13612020610701938
- Lederer P. (1994) Competitive delivered pricing and production Regional Science and Urban Economics 24, 229-252.
- Toni D. Sperandio Milan G. Busata Saciloto E. Larentis F. (2017) Pricing strategies and levels and their impact on corporate profitability Revista de Administração 52, 120–133
Author: Klaudia Szwajkosz