What is competitor based pricing?
We’ve all gone through the motions of wanting to purchase a specific product at the store and weighing our options. Maybe you’ve had a sweet caramel coffee calling your name for the past week and finally set out to buy it. On the shelves, you see a row of possible choices, but divert your eyes to the price tags, and that’s where the influence of competitive based pricing begins.
But competitive pricing isn’t the end all and be all of a consumer decision, which is why a competitive pricing strategy involves a lot more than just matching the prices of your rivals or offering a discount. Let us look at what is competitor based pricing.
How Does a Competitor Based Pricing Strategy Compare to Other Pricing Strategies?
Every brand needs some sort of competitive pricing strategy. They can’t simply paste any old number on a tag and call it a day – it needs to reflect your position in the market and hit the sweet spot between meeting customer expectations and making a profit. You don’t want to alienate your audience, but at the same time, not make your product seem essentially like a freebie.
Unlike other pricing strategies like basic cost-plus pricing or value-based pricing, competitor-based pricing is about setting prices rooted in competitor prices (including through dynamic pricing). Rather than looking inward and performing deep reflection on product differentiation, customer perceptions, and so on, your brand puts on its detective gear and looks at the external competition through competitor analysis. With these benchmarks in place, you can then either choose to price above, below, or compete by price matching.
How Competitor-Based Pricing Works
Let’s say that a company called Dust Droid is ready to release their new robot vacuum cleaner to the public. They could choose value based pricing and price based on special features such as multi-surface capabilities, superior navigation tactics, and voice control ability that aren’t available in the market today. Based on these factors, the company chooses a price of $1999, a margin higher than what other vacuums are sold for. With those premium features to justify the price, though, the brand believes customers will see some serious value in the product.
The potential issue with value based pricing is that the level of research and understanding needs to be exhaustive. Brands can’t simply expect customers to see the value they see because there’s such high risk involved that way. They need to conduct market research to properly gauge their perception and willingness to make a purchase.
If Dust Droid chooses to work with a competitor-based pricing strategy instead, based on competitive pricing analysis, there’s more to work with on the onset. Competitive analysis would involve examining all the robot vacuums that currently exist and are popular in the market. Maybe $2000 is still too steep of a price compared to competitor pricing but they still feel like they need to highlight its one-of-a-kind features. In light of this, the company might set its price at around $1600 instead, putting it above the mid-range options but not past an overly exclusive price point.
Advantages of Competitor-Based Pricing
Competitor-based pricing is a sound strategy for just about any business to try out, but it's especially handy if you need to be quick on your feet or make simpler pricing decisions, and want to stay in tune with how competitors price their products. So, what sorts of benefits does this response to a competitor pricing strategy come with?
It mitigates risk – No one wants to be out of touch with the market or their customers. Put a wildly overpriced product on the shelves, and nobody is likely to put it in their cart. Instead of risking poor sales volumes and damaging your reputation at the get-go, you can gain a more realistic idea of what customers are willing to spend.
It keeps your product relevant in the market – While pricing alone won’t always determine why a customer chooses a certain product, it’s certainly a big factor in certain cases. People want the best bang for their buck, so you don’t want to price shock your customers and lose your existing customers to a competitor.
A competitor based pricing strategy makes price optimization much simpler – All decisions in product development and marketing require research, but just how extensive that research is becomes the consideration. Competitor pricing data is typically readily available, which means you set your brand up for a more straightforward and less cumbersome decision-making process.
It allows for flexibility – Agility is one of the most important traits for any modern business, and any strategies that promote that are inherently valuable. Whenever competitors decide to change their pricing strategies, you can be right on the ball and quickly adjust your own prices to stay competitive with the changing pricing trends.
Disadvantages of Competitor-Based Pricing
No tactic is perfect, which means competitor-based pricing does come with a couple of considerations.
There might be a lack of differentiation – Especially if you’re part of a saturated market, overly if your prices and competitor prices are too similar, that could lead to even more decision fatigue for customers. It’ll become harder and harder to see what differentiates you from your rivals, potentially undermining all the hard work you put into your marketing and brand identity.
It could trigger a price war – Competitor-based pricing can act as your most valued competitive price strategy but lean too far into it as your magic formula, and price matching risks starting a price war that’s all about undercutting each other. There is no competitive advantage in that. It’s an unsustainable scenario that only serves to destroy the market altogether. Competitive pricing analysis can be taken too far, and it may all be in vain if you are not dealing with price sensitive customers.
You might overlook internal value – Forgetting something? A little competition is healthy, but what makes your product have inherent value is what makes it special. Are you giving too much away and devaluing the features you’ve put so much effort into? A product's pricing model is just one of its characteristics.
You might become more of a follower than a leader – Making decisions based on a competitor pricing strategy all the time could put you in a constant state of reactivity, dependent on competitor actions. That itself could lead your brand down a dark path of repressed creativity and a lack of identity. Competitive price monitoring is a tool, not an end in itself.
When to Use Competitor-Based Pricing
Even after weighing the pros and cons and sorting out ways to overcome those shortfalls, there are still inherent scenarios where competitive based pricing works best.
Startups and companies with little available resources could use it as a speedy way to find an acceptable price point. It doesn’t require you to understand how customers and the public perceive your brand and its value, and it’ll help you avoid the consequences of underpricing or overpricing. It can be easier to find pricing data (e.g. through price intelligence) than to know what customers want.
In the same vein, companies that need a quick route to market could make do with competitor-based pricing too as a shortcut to competitive advantage. There’s no need to overthink or over-research – all it involves is aligning a final price with those of established competitors.
Another major type of business that could benefit from this pricing strategy are those in super competitive markets, including where promotional pricing is common and price monitoring a useful way to monitor frequently changing prices. Relevancy is something that’s hard to get and even harder to maintain, no matter what context we refer to. These types of customers are spoiled for choice, meaning that setting prices becomes a whole different ball game. Competition based pricing acts as the perfect thermostat, levelling out prices to maintain profitability and their position in the market as well.
Best Practices for Implementing Competitor-Based Pricing
Although we might have made competition based pricing sound easy, the outputs depend largely on the effort you put into crafting an effective strategy, including price intelligence, monitoring competitor actions and price optimization. Merely knowing what another brand is charging won’t reveal any valuable information to help you spot trends and improve the pricing decision process, so put these best practices into play:
Make sure market research still remains a priority because you still need to know what you’re up against and how your customers behave - not least, whether they are price sensitive customers. Competitive intelligence services can help you figure out where you stand and equip you with the tools and data you need to push forward.
Segment your target audience and take stock of their specific needs and expectations. Some customers might value cost-savings over everything, while others place more importance on balance.
Don’t be a sheep. Sheep simply follow without knowing the rationale behind their actions. What you learn about your competitors should be studied. Why did they change their price this time? Why are they launching during this specific time? This understanding only serves to inform your own pricing decisions.
Communicate your USP so you keep your brand value at the forefront of everything you do. Cheap pricing isn’t usually enough to retain a loyal customer base – it’s striking a balance and consistently providing why customers should choose you time and time again.
Keep your finger on the pulse of the customer and competitive landscape and learn from your strategies. Did those promotional strategies work, or did they fall flat? The faster you figure out what works and what doesn’t, the faster you’ll be able to take those next steps towards a more relevant pricing strategy.
Gain a Strategic Edge with Competitor Intelligence
Some businesses seem to be able to hit the nail on the head with pricing every time – and many of them look at competitive intelligence tools to help collect pricing information and understand pricing trends.
Aqute Intelligence isn’t just any old traditional market research company – we’re experts at providing competitive intelligence for product teams and masters at deciphering competitor reports too. We’re able to give you the full inside scoop on who their customers are, how their products are priced, and whether their marketing strategy is working.
Want to operate better, clearer, faster, and stronger? Aqute knows how to compete. Reach out to us today for custom competitor analysis services and start winning against your competitors.
References:
https://blog.hubspot.com/sales/competition-based-pricing
https://getlucidity.com/strategy-resources/competitive-based-pricing-guide
https://www.paddle.com/blog/competitor-based-pricing
https://www.chargebee.com/resources/glossaries/competitive-pricing/
Need a quote for competitor research?
