Today, companies operate in a very competitive market. Especially among retailers, as there is considerable direct competition, they are often tempted to lower prices.
This is due to the fear of losing potential customers if they find, for example, the same product at a different price in a competitor. Especially when that price is lower than their own.
But the real problem is when the entrepreneur starts to change prices intuitively and without any structure or strategy. That is why it is so important for the success of e-commerce to set the right data-driven pricing strategy.
With this in mind, in this article you have everything you need to know to implement a competitive pricing strategy as soon as possible and, of course, with as little risk as possible.
You will also find out which tool can help you find the balance between supply and demand in relation to your differential pricing strategy.
What is a competitive pricing strategy?
Competitive pricing is a strategic study that allows to set a price for products and services according to the prices of rival companies.
This technique is based on two main aspects: the analysis of competition and market demand.
However, to minimise risk, it must also take into account the cost of production, supplier margins, customer loyalty and perceived value.
There is no doubt that companies that carry out a competitive price analysis have a better chance of success than those that do not have a defined strategy. This is because, by being able to offer lower prices than their competitors, they gain a competitive advantage over them.
This can be particularly beneficial for companies selling products that are in high demand. But it is also a popular option for retailers who offer similar services or products and want to attract new customers.
By offering a lower price, in addition to gaining market share, they are able to retain existing customers.
Examples of what are competitive pricing strategies?
When using competitive pricing strategies, firms rely on the industry average price to set the price of their product or service. They must therefore calculate the market equilibrium quantity and set the price according to the circumstances at the time.
Organisations using this method may choose to set prices below, at or above the competitor’s prices.
Here are some examples of competitive pricing.
Pricing higher than other options in the market.
If the seller opts for high prices, the product in question will have to offer some advantage that makes it attractive compared to the competition. In addition, the buyer will have to associate this high price with high quality.
For companies, distinguishing themselves from their competitors can be a challenge, but also an opportunity.
Price similar to your competitors.
Sometimes, you choose to set the same prices as your competitors. This avoids getting into the dreaded price wars, and instead, you position your products through marketing strategies that highlight the benefits or level of quality compared to other similar products.
Pricing below the competition.
A very common practice for companies whose goal is to attract customers and increase sales quickly is to price some products well below the market average. Although initially the profits are lower, the high volume of sales is expected to compensate for a lower margin. It is also advisable to have other complementary products to help compensate for this tight profit margin.
This method is known as the loss leader strategy, which is often used by companies to gain an edge over their competitors. The truth is that, although these products are often not profitable or do not offer short-term gains, they are used as a magnet to attract more customers and thus increase market share.
The danger of getting into a price war in e-commerce
Recently, e-commerce has become a highly competitive area and companies are constantly looking at how to reduce the price of a product to make it stand out from the crowd.
The problem comes when this competition turns into a “price war”.
So much so that many companies are forced to reduce their profit margins in order to achieve the desired price equilibrium with the competition. This fight aims to attract the most customers and gain a foothold in the distribution channel ahead of the competition, or to eliminate a potentially dangerous competitor in order to stay ahead.
But this is not always the case and ends up ruining the business. To make sure that doesn’t happen, here are some recommendations:
- Surprise the market to create a bigger impact. This will help the consumer understand that your brand has something unique to offer.
- Be aware of the different scenarios that could occur and determine how you will act in each case.
- The best defence is a good offence. Stay ahead of your competition and set the pace.
Relevant factors to implement a competitive pricing strategy.
There are a few things to consider before adopting this type of pricing strategy, for example:
- Confirm that your prices are fair: they should not be excessively low just for abuse of power. On the other hand, no matter how good your products are, if they don’t have a price that the customer is willing to pay, they will not sell well. Find the right balance.
- Constantly update prices to reflect changes in the market. This point is key if you want to be successful with this type of strategy. For this, it is almost essential to have a powerful price tracking and dynamic pricing tool such as Boardfy.
- Make it easy for your customers to find you and compare you. This way they will be able to discover that you are the best option among all the competition.
In short, you need a strategic pricing plan that is not only flexible, but also transparent and easy to understand.
Pros and cons of competitive pricing
Competitive pricing can be an excellent way to increase sales and market presence.
However, as you know, nothing is perfect. Here are some advantages and disadvantages to consider if you want to go for competitive prices
Advantages of competitive pricing
Implementing a competitive pricing strategy for established products in the market has a number of advantages:
- Regular flow of customers: keeping prices similar to those of your competitors helps you to ensure a constant income.
- Avoid price wars: setting a similar pricing policy to others is a way to avoid entering into aggressive competition that can have negative effects on your business.
- Help improve the bottom line: A competitive pricing strategy, in combination with other complementary pricing strategies, will help to achieve higher profits and better results. Using a mix of pricing and marketing strategies can make companies a unique brand and stand out from the crowd.
Disadvantages of competitive pricing
Competitive pricing can be an effective marketing strategy to attract more customers, but it also has several disadvantages.
- Reduced profit margins: This can be a particularly serious problem for companies that do not comfortably cover their costs. A price reduction could mean a drop in revenue that they cannot afford.
- Damaging brand image: Competitive pricing can also give the impression that the quality of a product is inferior or equal to others. This can be a problem for companies seeking to increase the perceived value of their products.
- Difficulty in acquiring new customers: It can be difficult if you have the same or very similar product at the same price as others. Therefore, you will have to look for other qualities that will attract consumers and offer them something different.
What other pricing strategies are there?
Pricing is an essential task within every company to determine the prices of the goods and services they offer. To a large extent, the success or failure of the business depends on it.
There are several factors to take into account when setting a price, such as the type of product or service, the cost of production, the technology used or the characteristics of the distribution channel, among others.
All these aspects must be optimised in order to obtain a good price and to analyse which strategy is best suited to each of the business ideas you have underway.
Here we explain some of the most relevant pricing strategies applied in online commerce.
The price discrimination strategy consists of selling the same product at different prices depending on the type of final consumer. In other words, the price is associated with the consumer surplus or, in other words, the difference between what they are willing to pay for a product and the final price they pay for it.
In this way, a wider range of customers can be reached, from those with tighter budgets to others with higher margins. However, to apply this type of strategy, it is necessary to have a deep knowledge of the market and of the buying habits, preferences and economy of the different types of consumers.
These are strategies in which a high price is set for the product or service, based mainly on the added value perceived by customers.
In this way, it is possible to set a price well above the cost of the product and maximise revenue. To achieve this, it is necessary to invest heavily in branding and marketing, to attack the emotions of those consumers who are willing to pay a higher price for the product. You need to make them feel that they need the item, either because of its quality level, features and/or exclusivity.
This technique is based on customer perception and is used to influence consumer behaviour in order to increase sales.
In other words, psychological pricing is not only based on the actual price of the products, but also on the way these prices are presented and communicated.
Some examples of this type of pricing are:
- Quantity discounts associated with offers such as “buy 2 get 1 free”.
- Special offers such as “one price only”.
- Odd prices such as those ending in 97 or 99 instead of rounding up to the unit to generate the first impact of being cheaper.
Pricing for new products
When a product is at an early stage of market contact, it is very likely that one of two pricing strategies for new products will be followed:
- In case the product is innovative, the skimming strategy is recommended, based on setting a high price, accompanied by powerful promotional campaigns and focused on specific customer segments, and then lowering the price and attracting the rest of the segments as the supply in the sector increases.
- If the product is not considered a novelty or if it is believed that it can be easily imitated, the penetration strategy is more advisable. In this case, based on low prices from the first moment the product is launched, bearing in mind that demand is linked to price.
Pricing for captive products
To understand the following pricing strategy, it is important to first be clear about the definition of captive products:
These are items that are sold separately but necessarily complement each other.
That is, there is a main product that is sold at a very low price or even for free, but which requires other complementary products or other accessories to be really useful.
For example, coffee machines and coffee capsules, printers and ink cartridges or razors and their blades.
But don’t think that this is only for products, this strategy is also valid for services. For example, admission to a children’s playground (at low cost or free for children).
Outperform your competition with Boardfy
Designing a pricing strategy is a complex process and requires both time and patience to carry out properly. Extensive research needs to be done on competitors to understand the company’s position in the market.
This is a high investment of time and energy if you choose to do it manually. For this reason, businesses that currently excel in the marketplace are opting to automate their pricing system.
For example, with digital tools such as Boardfy, our leading platform in price monitoring and dynamic pricing equipped with artificial intelligence, which allows optimising e-commerce commercial operations, such as Google Shopping campaigns or getting the Buy Box on Amazon.
Monitoring competitors’ prices is vital to ensure the success of an online business.
Boardfy helps you beat your competition thanks to its speed, customisability and automations. You will know your competitors’ prices and your position against them almost in real time, so you can always be the first to make a move.
As you can see, at Boardfy, we go far beyond simple price monitoring. In addition, we also detect the rating and evolution of the valuations of your products to help you decide what action to take at any given moment.
Boardfy is the tool you need to save time in your business and position yourself as the best among your competitors.
Boardfy is easy to use and does not require a lot of technical knowledge. It offers an intuitive interface so you can quickly get used to the platform. And, of course, you have excellent technical support to help you make the most of all its features.
Request a demo and become the best competitor.