A Competitive Pricing strategy starts by looking at market analysis, value-based pricing, price differentiation, and promotional pricing. Additional factors to consider include target marketanalysis, competitive landscape assessment, and cost structure analysis. Implementing competitive pricing strategies can offer benefits like gaining market share and attracting customers, but challenges such as price wars and maintaining perceived value should be considered. Adapting to dynamic market conditions is crucial for success.
Price Parity: Competitive pricing seeks to align a business’s prices with the prevailing market rates for similar products or services.
Market Competitiveness: It is often used by established businesses or products to remain competitive within a specific industry or market.
Price Elasticity: Businesses adopting competitive pricing assume that demand for their product is elastic, meaning consumers are sensitive to price changes.
Regular Monitoring: To maintain competitiveness, businesses need to monitor competitors’ prices and adjust their own as necessary.
Competitive Pricing Strategies
Matching Competitor Prices: This involves setting prices at the same level as competitors’ prices. Businesses may match prices on specific products or across their entire product line.
Price Leadership: A business may choose to become a price leader by setting prices lower than competitors, aiming to gain market share and potentially force competitors to follow suit.
Price Following: Conversely, businesses can follow the pricing strategies of their competitors. They monitor competitors’ price changes and adjust their own prices accordingly.
Real-World Examples of Competitive Pricing
Airline Industry: Airlines often engage in competitive pricing by adjusting ticket prices to match or undercut competitors. This dynamic pricingstrategy takes into account factors like demand, seat availability, and timing.
Online Retail: E-commerce platforms continuously monitor the prices of similar products offered by competitors and adjust their prices to remain competitive. Customers benefit from lower prices and choices.
Fast Food Chains: Fast-food restaurants frequently offer competitive pricing through value meals and special promotions. These pricing strategies attract price-sensitive consumers and create loyalty.
Benefits of Competitive Pricing
Customer Attraction: Competitive pricing attracts price-conscious consumers who are looking for the best deals, potentially increasing customer traffic.
Market Share: By offering competitive prices, businesses can gain or maintain market share, which is crucial for long-term growth and sustainability.
Market Positioning: Competitive pricing helps businesses position themselves as affordable options within their industry or market.
Competitive Advantage: Regularly adjusting prices based on market conditions and competitors’ actions can give a business a competitive edge.
Challenges and Considerations
Profit Margins: While competitive pricing can drive sales volume, businesses must carefully manage their profit margins to avoid losses.
Brand Perception: Competing solely on price can sometimes undermine a brand’s perceived value or quality.
Sustainability: Maintaining low prices in the long term may be challenging for businesses with high production or operational costs.
Competitor Reactions: Competitors may respond with price wars, potentially harming profit margins for all players.
Key Highlights of Competitive Pricing Strategy:
Strategy: A Competitive Pricing strategy involves market analysis, value-based pricing, price differentiation, and promotional pricing.
Factors to Consider: Target market analysis, competitive landscape assessment, evaluation of the value proposition, analysis of cost structure, and clear pricing objectives.
Benefits: Offers opportunities to gain market share, achieve competitive advantage differentiation, and attract/retain customers.
Opportunity for Market Share: Competitive pricing can help capture a larger market share.
Competitive Advantage: Differentiates the business in the competitive landscape.
Attracting Customers: Competitive pricing attracts and retains customers.
Challenges: Risks of price wars, balancing price competitiveness with perceived value, and adapting to dynamic market conditions.
Case Study
Strategy
Outcome
Walmart
Competitive Pricing: Priced products lower than competitors to attract price-sensitive customers.
Increased market share and sales volume, maintaining leadership in the retail market.
Amazon
Competitive Pricing: Continuously monitored and adjusted prices to match or undercut competitors.
Boosted customer acquisition and loyalty, driving high sales volume and market dominance.
Airbnb
Competitive Pricing: Allowed hosts to set competitive prices based on local market rates.
Increased bookings and host satisfaction, driving platform growth and market share.
Delta Airlines
Competitive Pricing: Adjusted ticket prices to remain competitive with other airlines on similar routes.
Increased passenger load factors and market share, driving revenue growth.
Samsung
Competitive Pricing: Priced smartphones and electronics competitively against other major brands like Apple.
Increased market share and sales volume, maintaining competitiveness in the electronics market.
McDonald’s
Competitive Pricing: Priced menu items lower or comparable to other fast-food chains.
Increased customer traffic and sales, maintaining a strong position in the fast-food industry.
Toyota
Competitive Pricing: Priced vehicles competitively against other major car brands.
Increased market share and sales, driving revenue growth and brand loyalty.
Netflix
Competitive Pricing: Priced subscription plans competitively against other streaming services.
Increased subscriber base and market share, driving revenue growth and platform expansion.
PepsiCo
Competitive Pricing: Priced beverages and snacks competitively against other major brands like Coca-Cola.
Increased market share and sales volume, maintaining competitiveness in the beverage market.
Costco
Competitive Pricing: Priced bulk items lower than competitors to attract price-sensitive customers.
Increased membership and sales volume, maintaining a strong market position.
Procter & Gamble
Competitive Pricing: Priced household and personal care products competitively against other major brands.
Increased market share and sales volume, driving revenue growth.
Uber
Competitive Pricing: Adjusted ride fares to be competitive with other ride-sharing services like Lyft.
Increased rider base and market share, driving revenue growth and platform usage.
Best Buy
Competitive Pricing: Offered price matching to compete with other electronics retailers and online stores.
Increased customer trust and sales, maintaining competitiveness in the retail market.
Target
Competitive Pricing: Priced products competitively against other major retailers like Walmart.
Increased customer traffic and sales, driving market share growth.
Nike
Competitive Pricing: Priced sportswear and footwear competitively against other major brands like Adidas.
Increased market share and sales, driving brand loyalty and revenue growth.
H&M
Competitive Pricing: Priced clothing and accessories competitively against other fast-fashion brands.
Increased customer traffic and sales volume, maintaining competitiveness in the fashion market.
CVS Pharmacy
Competitive Pricing: Priced health and wellness products competitively against other pharmacy chains.
Increased customer traffic and sales, driving revenue growth and market share.
Delta Airlines
Competitive Pricing: Adjusted ticket prices to remain competitive with other airlines on similar routes.
Increased passenger load factors and market share, driving revenue growth.
LinkedIn
Competitive Pricing: Priced premium subscriptions competitively against other professional services.
Increased premium subscriber base and revenue, enhancing platform usage and engagement.
Spotify
Competitive Pricing: Priced subscription plans competitively against other music streaming services like Apple Music.
Increased subscriber base and market share, driving revenue growth and platform expansion.
Expanded Pricing Strategies Explorer
Pricing Strategy
Description
Key Insights
Cost-Plus Pricing
Markup added to production cost for profit
Ensures costs are covered and provides a predictable profit margin.
Value-Based Pricing
Prices set based on perceived customer value
Aligns prices with what customers are willing to pay for the product or service.
Competitive Pricing
Pricing in line with competitors or undercutting
Helps maintain competitiveness and market share.
Dynamic Pricing
Prices adjusted based on real-time demand
Maximizes revenue by responding to changing market conditions.
Penetration Pricing
Low initial prices to gain market share
Attracts price-sensitive customers and establishes brand presence.
Price Skimming
High initial prices gradually lowered
Capitalizes on early adopters’ willingness to pay a premium.
Bundle Pricing
Multiple products or services as a package
Increases the perceived value and encourages upselling.
Psychological Pricing
Pricing strategies based on psychology
Leverages pricing cues like $9.99 instead of $10 for perceived savings.
Freemium Pricing
Free basic version with premium paid features
Attracts a wide user base and converts some to paying customers.
Subscription Pricing
Recurring fee for ongoing access or service
Creates predictable revenue and fosters customer loyalty.
Skimming and Scanning
Continually adjusting prices based on market dynamics
Adapts to changing market conditions and optimizes pricing.
Promotional Pricing
Temporarily lowering prices for promotions
Encourages short-term purchases and boosts sales volume.
Geographic Pricing
Adjusting prices based on geographic location
Accounts for variations in cost of living and local demand.
Anchor Pricing
High initial price as a reference point
Influences perception of value and makes other options seem more affordable.
Odd-Even Pricing
Prices just below round numbers (e.g., $19.99)
Creates a perception of lower cost and encourages purchases.
Loss Leader Pricing
Offering a product below cost to attract customers
Drives traffic and encourages additional purchases.
Prestige Pricing
High prices to convey exclusivity and quality
Appeals to premium or luxury markets and enhances brand image.
Value-Based Bundling
Combining complementary products for value
Encourages customers to buy more while receiving a perceived discount.
Decoy Pricing
Less attractive third option to influence choice
Guides customers toward a preferred option.
Pay What You Want (PWYW)
Customers choose the price they want to pay
Promotes customer goodwill and can lead to higher payments.
Dynamic Bundle Pricing
Prices for bundled products based on customer choices
Tailors bundles to customer preferences.
Segmented Pricing
Different prices for the same product by segments
Considers diverse customer groups and willingness to pay.
Target Pricing
Prices set based on a specific target margin
Ensures profitability based on specific financial goals.
Loss Aversion Pricing
Emphasizes potential losses averted by purchase
Encourages decision-making by highlighting potential losses.
Membership Pricing
Exclusive pricing for members of loyalty programs
Fosters customer loyalty and membership growth.
Seasonal Pricing
Price adjustments based on seasonal demand
Matches pricing to fluctuations in consumer behavior.
FOMO Pricing (Fear of Missing Out)
Limited-time discounts or deals
Creates urgency and encourages purchases.
Predatory Pricing
Low prices to deter competitors or drive them out
Strategic pricing to gain market dominance.
Price Discrimination
Different prices to different customer segments
Capitalizes on varying willingness to pay.
Price Lining
Different versions of a product at different prices
Catering to various customer preferences.
Quantity Discount
Discounts for bulk or volume purchases
Encourages larger orders and repeat business.
Early Bird Pricing
Lower prices for early adopters or advance buyers
Rewards early commitment and generates initial sales.
Late Payment Penalties
Additional fees for late payments
Encourages timely payments and revenue collection.
Bait-and-Switch Pricing
Attracting with a low-priced item, then upselling
Uses attractive deals to lure customers to higher-priced options.
Group Buying Discounts
Discounts for purchases made by a group or community
Encourages collective buying and customer loyalty.
Lease or Rent-to-Own Pricing
Lease with an option to purchase later
Provides flexibility and ownership choice for customers.
Bid Pricing
Customers bid on products or services
Prices determined by customer demand and willingness to pay.
Quantity Surcharge
Charging a fee for purchasing below a certain quantity
Encourages larger orders and higher sales.
Referral Pricing
Discounts or incentives for customer referrals
Leverages word-of-mouth marketing and customer networks.
Tiered Pricing
Multiple price levels based on features or benefits
Appeals to customers with varying needs and budgets.
Charity Pricing
Donating a portion of sales to a charitable cause
Aligns with corporate social responsibility and attracts conscious consumers.
Behavioral Pricing
Price adjustments based on customer behavior
Customizes pricing based on customer interactions and preferences.
Mystery Pricing
Prices hidden until the product is added to the cart
Encourages customer engagement and commitment.
Variable Cost Pricing
Prices adjusted based on variable production costs
Reflects cost changes and maintains profitability.
Demand-Based Pricing
Prices set based on demand patterns and peak periods
Maximizes revenue during high-demand periods.
Cost Leadership Pricing
Competing by offering the lowest prices in the market
Focuses on cost efficiencies and price competitiveness.
Asset Utilization Pricing
Pricing based on the utilization of assets
Optimizes revenue for assets like rental cars or hotel rooms.
Markup Pricing
Fixed percentage or dollar amount added as profit
Ensures consistent profit margins on products.
Value Pricing
Premium pricing for products with unique value
Attracts customers willing to pay more for exceptional features.
Sustainable Pricing
Pricing emphasizes environmental or ethical considerations
Appeals to conscious consumers and supports sustainability goals.
Price skimming is primarily used to maximize profits when a new product or service is released. Price skimming is a product pricing strategy where a company charges the highest initial price a customer is willing to pay and then lowers the price over time.
Productized services are services that are sold with clearly defined parameters and pricing. In short, that is about taking any product and transforming it into a service. This trend has been strong as the subscription-based economy developed.
Menu costs describe any cost that a business must absorb when it decides to change its prices. The term itself references restaurants that must incur the cost of reprinting their menus every time they want to increase the price of an item. In an economic context, menu costs are expenses that are incurred whenever a business decides to change its prices.
A price floor is a control placed on a good, service, or commodity to stop its price from falling below a certain limit. Therefore, a price floor is the lowest legal price a good, service, or commodity can sell for in the market. One of the best-known examples of a price floor is the minimum wage, a control set by the government to ensure employees receive an income that affords them a basic standard of living.
Predatory pricing is the act of setting prices low to eliminate competition. Industry dominant firms use predatory pricing to undercut the prices of their competitors to the point where they are making a loss in the short term. Predatory prices help incumbents keep a monopolistic position, by forcing new entrants out of the market.
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.
A price maker is a player who sets the price, independently from what the market does. The price setter is the firm with the influence, market power, and differentiation to be able to set the price for the whole market, thus charging more and yet still driving substantial sales without losing market shares.
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall businessmodel.
Geographical pricing is the process of adjusting the sale price of a product or service according to the location of the buyer. Therefore, geographical pricing is a strategy where the business adjusts the sale price of an item according to the geographic region where the item is sold. The strategy helps the business maximize revenue by reducing the cost of transporting goods to different markets. However, geographical pricing can also be used to create an impression of regional scarcity, novelty, or prestige.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors.
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organizationscale further.
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
