Pricing is one of the most important decisions a company has to make. It can impact many aspects like sales, market share, and consistency. Our prices need to be competitive for us to succeed in today’s marketplace. This is why each company should consider pricing strategies to increase sales and help businesses grow.
One of the most popular pricing strategies is competition-based pricing. However, it is an incredibly contentious topic. On the one hand, competitive pricing is a fantastic way to create customer loyalty and maximize earnings. However, there are many arguments against using competition as your pricing strategy. Which side of the fence are you on? There are both pros and cons of competition-based pricing that we will dive into in this article.
What Is Competition-Based Pricing?
Competition-based pricing is about using a strategy of price cutting against your competitors. It’s a popular strategy among low-cost vendors to try and compete with higher-priced competitors. However, many people have doubts about competition-based pricing because they believe it creates loyalty issues.
Today many companies use different pricing strategies. A very good resource can be found on softwarepricing.com, where you will see examples of innovative pricing strategies in software. The Software Pricing Partners company supports businesses to develop unique strategies to increase sales and minimize risks at each stage of the pricing process.
How Can Competition-Based Pricing Help Your Business?
Competition-based pricing can help increase sales but maybe not profit. People can buy your products or services if you have the lowest prices. But more likely to buy your product if they understand the value to the company and are generally willing to pay a premier if that value is high. Moreover, you should keep in mind that you will earn a lower profit margin after the price reduction is implemented.
Pros Of Competition Based Pricing
The biggest pro of competition-based pricing is that you become one of the cheapest solutions available in your market. After all, your competitors are doing this, and by matching their prices, you can reap huge benefits. In some cases, price competition can even help your business grow through increased sales from new customers.
It’s Fairly Simple
Competition-based pricing is a simple strategy to implement. If you are thinking about lowering your price, go ahead and do it. However, you should be aware of the consequences that can follow after this decision. That’s why you should have a goal in mind instead of blindly implementing competition-based pricing.
For example, if you want to attract more customers or gain more market share, then lowering your price will help with these goals. However, if your goal is to increase profit margins, then lowering prices may not be the best idea.
It’s Low Risk
Another important reason why competition-based pricing works is low-risk because the chances of not being profitable are low compared to other strategies. So if your competitors go live with this strategy, you will.
It Can Be Accurate
Competition-based pricing can be accurate, especially in saturated industries like software solutions. This market provides enough data to move pricing toward a methodology based on market price and market share.
Cons Of Competition Based Pricing
The biggest problem with competition-based pricing is typical, there is no actual need for it because each business has different costs and different markets.
It Leads To Missed Opportunities
Sometimes businesses don’t really need to use competition-based pricing. Instead, they can focus on building a better product or service and win customers by innovation. It can also be a cheaper solution than price wars.
Many Companies Copy
Why lower your prices if you know your competitors will do it as well? It makes no sense, especially if you have a strong brand. By reducing your price, you are just contributing to the problem by making price the most important factor for a customer’s buying decision instead of the quality of your product or service.
Short Term Thinking
A lot of companies often have short-term thinking, which makes them use competition-based pricing. But usually, this strategy is effective only in the short term. Longer-term views will allow you to be different from your competitors and grow without being involved in a price war.
Should Competitive-Based Pricing Be An Aspect Of Your Pricing Model?
Companies in different industries use many pricing strategies. However, competition-based pricing is often mentioned among products or services in the same business. It’s a strategy that many companies use to gain more customers, increase sales, and still stay competitive.
If you have good margins and a strong brand image, you don’t need to consider lowering your price. In such cases, you can rely on promotions, running competitions, expanding your market, and other pricing strategies that are more appropriate for your particular situation.
The Bottom Line
All businesses have different needs and different opportunities. It is important to look at all the possible pricing strategies you can use for your business and stick with the one suitable for your company. For example, price based on your competitors is a better strategy if you want to increase sales and customer loyalty promptly.
In most cases, it’s not a bad idea to price according to how other companies charge for similar products or services. The problem is that customers often don’t know anyone else who uses identical products or services and may be unable to compare their products with those of other companies.