Competitive prices to outperform your rivals
Cutting prices for fear of losing customers usually ends with less margin and the same customers. Competing on price works when you decide with data and with a floor you never cross.
A competitive pricing strategy sets the price of each product using what your direct competitors charge as the reference: below, level with or above them. To make it work you need three things: up-to-date price data, a minimum price calculated from your costs and clear rules on when to follow the market and when not to.
Key takeaways
- Competitive prices are set according to competitors’ prices, but the floor is set by your costs and the minimum margin you accept.
- There are three possible positions: a price below the competition to gain share, a price similar to the competition to compete on service, or a price above the competition if the product offers something that justifies the difference.
- Cutting your price by 5% can mean selling over 50% more units to earn the same, as the example in this article shows.
- A price war is avoided with rules defined in advance: when to follow a rival, when to ignore them and which price is never crossed.
- Comparing properly means matching the same product (same EAN or SKU) and deciding whether to compare prices with or without shipping costs.
What is a competitive pricing strategy?
Competitive pricing is a method of setting the price of products and services based on the prices of rival companies. It relies on two references: competitor analysis and market demand.
Competitors’ prices are not enough to make a decision. A competitive pricing strategy also takes into account the cost of the product, supplier terms, the commission charged by each channel, customer loyalty and the value the customer perceives. Without that data, copying a rival’s price also means copying their cost structure, which is not yours.
Shops that analyse competitors’ prices systematically decide with information rather than gut feeling. That information can be gathered by hand for a small catalogue, but with hundreds of products you need a price intelligence tool that collects the data and organises it by product. If you want the method step by step, there is a guide on how to conduct a competitive price analysis.
The strategy suits high-demand products that are easy to compare above all, such as electronics, household and personal care goods or spare parts, where the buyer sees several prices in seconds. It is also used by retailers that sell products similar to other retailers’ and want to attract new customers without losing the ones they have.
Three price positions relative to the competition
Companies that use competitive pricing take the average market price for each product as their reference and decide where to position themselves. That position can change by product, by channel or by time of year.
| Position | When it fits | What you need | Main risk |
|---|---|---|---|
| Price above the competition | Product with a clear advantage: brand, warranty, service, delivery time | The customer must see and value that advantage | Losing sales if the advantage is not understood |
| Price similar to the competition | Markets with stable prices and similar products | Stand out through marketing, service or range | Nothing sets you apart and the customer keeps buying where they already did |
| Price below the competition | Gaining share quickly, entering a market or attracting traffic | Enough margin, or complementary products that make up for it | Price war and a margin that does not cover costs |
Price above the competition. A higher price only holds up if the product offers something that makes it more attractive than the competition and if the buyer associates that price with higher quality or better service.
Price similar to the competition. Matching the price reduces the risk of a price war if you do not react to every cut, and moves the competition onto other ground: the product page, delivery times, customer service or reviews.
Price below the competition. Setting some prices well below the market average is a common way to attract customers and increase sales quickly. The margin per unit falls, and the bet is that volume will make up for it or that customers will also buy complementary products with a higher margin.
When a product is deliberately sold for less than it cost, this is known as a loss leader strategy: the product acts as a magnet to attract customers and gain market share. In Spain, selling at a loss has legal limits: article 14 of Law 7/1996 on Retail Trade (in Spanish) and article 17 of Law 3/1991 on Unfair Competition treat it as unfair if it misleads customers about the price level of the rest of the shop, discredits another product or retailer, or is part of a strategy to eliminate a competitor. Law 7/1996 adds the case of selling at a loss together with false price information that leads the consumer into a purchase they would not otherwise have made. Rules on below-cost selling differ from country to country, so check the ones that apply where you sell.
Example: how much margin each position leaves
A product costs the seller €40, the channel charges a 12% commission on the selling price, and shipping and order preparation add up to €5 per unit. The main competitor sells it at €60. All amounts exclude VAT and the commission is an assumption for the example, not the fee of any particular marketplace.
| Position | Price | Commission (12%) | Margin per unit | Margin on price |
|---|---|---|---|---|
| 5% below | €57.00 | €6.84 | €5.16 | 9.1% |
| Level | €60.00 | €7.20 | €7.80 | 13.0% |
| 5% above | €63.00 | €7.56 | €10.44 | 16.6% |
The margin per unit is calculated as price minus cost, commission and shipping: 57 – 40 – 6.84 – 5 = €5.16. At €57, the seller earns €5.16 per unit compared with €7.80 at €60. To earn the same in total, they need to sell 7.80 / 5.16 = 1.51 times as much, which means 51% more units for a discount of only 5%.
The same calculation gives the minimum price. With no margin, the break-even price is 45 / 0.88 = €51.14; with a minimum margin of €5 per unit, it is (45 + 5) / 0.88 = €56.82. That is the floor no pricing rule should cross. At €57, the discounted price is only 18 cents above the floor with the minimum margin (€56.82). To calculate yours with all your costs, follow the guide on profit margin calculation.
How to avoid a price war
A price war starts when two or more sellers respond to every price cut with another cut, until the price no longer covers the costs of at least one of them. It happens easily in e-commerce, because prices are visible and many shops use automated rules that react to each other.
Whoever starts it usually wants to attract more customers, take space on a channel before anyone else or push a competitor out. The previous example shows the cost: each cut requires much more volume to earn the same, and if the rival matches it, the extra volume disappears and only the lost margin remains.
These recommendations help you stay out of one:
- Differentiate before you cut: next-day delivery, a bundle or an extended warranty can matter more than a few cents’ difference.
- Plan for the scenarios and decide how you will act in each one: what you do if a rival cuts by 5%, by 20% or runs out of stock. Keep the final profitability of every sale in view.
- Set a minimum price per product: calculated from cost and commissions, as in the example, so that no reaction crosses it.
- Stay ahead of your competitors: if you know their moves and their price history, you can raise prices when the market allows it and not just cut them when you are forced to.
Relevant factors for applying a competitive pricing strategy
Before adopting a competitive pricing strategy, review these factors:
- Make sure your prices are fair and sustainable: a price that is too low cannot be kept up over time, and one that is too high will not sell however good the product is. The balance lies between your minimum price and what the customer is willing to pay.
- Compare like with like: match each product with the competitor’s by EAN or SKU, and decide whether you compare prices with or without shipping costs. If you ship for free, a rival who is €2 cheaper but charges €4.95 for delivery is not cheaper.
- Update prices to reflect market changes: competitors’ prices change frequently in many categories, and data from a month ago is no use for deciding today. With a large catalogue, manual updates cannot keep up and you need a dynamic pricing tool.
- Make it easy for customers to find and compare you: if your price is competitive, make sure it shows on price comparison sites, on Google Shopping and on the marketplaces where you sell.
- Follow the rules on advertising discounts: in the EU, when you announce a price reduction, the previous price you display must be the lowest price you applied in a period of at least the 30 days before the reduction, under Directive (EU) 2019/2161. In Spain, the rule is set out in article 20 of Law 7/1996 (in Spanish), which uses exactly 30 days and does not apply it to items put on sale for the first time.
A competitive pricing strategy needs planning that is flexible and, at the same time, transparent and easy for your team to understand: who decides, with what data and within what limits.
Pros and cons of competitive pricing
Competitive pricing can increase sales and market presence, but it has costs you should know about before applying it.
Advantages of competitive pricing
A competitive pricing strategy for products that are already established in the market has these advantages:
- A steady flow of customers: keeping prices close to the competition’s helps sustain consistent revenue, because you lose fewer sales to price differences.
- Avoiding price wars: a pricing policy aligned with the market’s, without reacting to every cut, reduces the risk of entering an aggressive contest that damages everyone’s margin.
- Better results: combined with other pricing and marketing strategies, it lets you raise margin on products where nobody is competing and push hard only where you need to.
Disadvantages of competitive pricing
Competitive pricing also has several disadvantages:
- Lower profit margins: this is a serious problem for companies that do not cover their costs comfortably, because a price cut can take away revenue they cannot afford to lose.
- Damage to brand image: a low price can suggest that the product is of lower quality, a problem for anyone who wants to increase perceived value.
- Difficulty winning new customers if you only match: if you match the price and offer nothing more, the customer has no reason to switch shops. You need to offer something different: service, range or terms.
- Dependence on the competition: if your prices follow other sellers’, their pricing mistakes become yours too.
What other pricing strategies are there?
Competitive pricing is one of several pricing strategies. The type of product, the cost, the distribution channel and the target customer all play a part, and each business can combine several. These are the most widely used in online retail:
| Strategy | How it sets the price | Example |
|---|---|---|
| Price discrimination | Different prices for the same product depending on the type of customer | Student discount |
| Premium pricing | High price based on perceived value | Luxury brand or limited edition |
| Psychological pricing | The way the price is presented to influence the purchase | €19.99 instead of €20 |
| Price skimming | High price at launch, then gradual reductions | New smartphone model |
| Penetration pricing | Low price from launch to gain share | New brand in a crowded category |
| Captive product pricing | Cheap core product and consumables with a margin | Printer and ink cartridges |
- Price discrimination: price discrimination sells the same product at different prices depending on the type of customer, to get closer to what each group is willing to pay.
- Premium pricing: a premium pricing strategy sets a high price backed by perceived value (brand, quality or exclusivity) and requires investment in the brand to sustain it.
- Psychological pricing: works on how the price is presented, such as price anchoring, which shows an expensive model first so that the mid-range one seems reasonable.
- Price skimming: launches the product at a high price for early buyers and lowers it as competitors arrive.
- Penetration pricing: entering with low prices from launch to gain share when demand depends heavily on price, a common tactic in a market penetration strategy.
- Captive product pricing: sells the core product cheaply and makes its margin on the consumables it needs, as with printers and their ink cartridges.
Competitive pricing: its impact on the online market
Competitive pricing changes the market because online shoppers compare before they decide. On price comparison sites, Google Shopping and marketplaces, several offers for the same product appear side by side, and the price difference, shipping included, is the first thing people see.
On marketplaces, price matters even more. On Amazon, for example, several sellers share the same product page and only one holds the Featured Offer (Buy Box); price is one of the factors, along with shipping, seller history and availability. We explain it in how the Amazon Buy Box works.
As a result, prices move more often and in chains: when one seller changes their price, those using automated rules react, and the market price of a product can change several times in the same day. A competitive price is not set once; it is reviewed as often as the market changes.
Applied well, a competitive pricing strategy attracts new customers and keeps existing ones without giving up profitability, because it competes where it has to and raises margin where competitors are not pushing.
How can you compete on price without losing margin?
To compete on price you need each rival’s price and a margin floor. Boardfy is a SaaS platform for competitor price monitoring and dynamic pricing for e-commerce, with direct price updates on Amazon, eBay, Google Shopping and Mirakl marketplaces.
- Boardfy matches products by EAN or SKU and compares prices with or without shipping.
- Boardfy carries out competitor price monitoring every 6 hours and applies your rules every 30 minutes, without going below your minimum.
- Boardfy calculates your margin from cost, deducting marketplace commission, payment fees and other costs.
Boardfy does not decide your strategy: it applies the rules you define. On channels without a direct connection, the new price is sent to your shop or your ERP. You can try Boardfy free for 7 days, no card required.
