What Is Competitive Pricing? (Definition And Advantages)

By Indeed Editorial Team

Published 15 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Working in sales, marketing and business requires individuals to develop methods to retain or expand product sales margins. Competitor-based pricing helps businesses enhance sales for products similar to those of their competitors. By researching more about competitor-based pricing, you can enhance your credentials at work and impress employers during interviews. In this article, we examine what competitive pricing is, see what jobs use it, review competitor-based pricing options and tips for competitive pricing strategies, outline both the advantages and disadvantages of competitor-based pricing and explore frequently asked questions.

What Is Competitive Pricing?

Competitive pricing is a pricing strategy in which companies set market prices for their products that are equivalent to those of comparable competitor products. An example of this is if a certain electronics manufacturer priced their new tablet at ₹20,000 rather than ₹30,000 because their closest competitor sells tablets for the same price. If a company's tablet has more features than its competitor, it may choose to offer it for ₹25,000 rather than ₹30,000. When multiple businesses market similar kinds of products and services, utilising competitor-based pricing can help maintain profit margins.

Related: List Of 11 Types Of Pricing Strategies (With Their Benefits)

What Jobs Require Knowledge Of Competitor-Based Pricing?

A wide range of roles demand experts who can understand competitor-based pricing and develop competitive price strategies. These are some roles that make use of competitor-based pricing strategies:

  • Pricing analyst: Conducting research and assisting firms in creating competitive prices are the primary responsibilities of a pricing analyst. Marketers may consider several competitor-based pricing models that are most effective for a business and determine what prices can provide them with the most competitive advantage.

  • Product engineer: These experts develop products and estimate the labour, materials and production time required to make them. Because of their position, they offer information on the potential market price ranges for a product.

  • Manufacturing specialist: Manufacturing specialists decide on the techniques for mass production of a certain product and the manufacturing methods to use. They aid in the development of relative production costs that impact market price.

  • Market research analyst: To support marketing efforts, this type of marketing specialist performs research on market trends, customer demographics and business competitors. They also collaborate with the sales and marketing teams to share updates on new products from rival companies and current market prices.

  • Accounting manager: Accounting managers oversee department staff and monitor all operating expenses. They can provide insight into product pricing because they are aware of the operating expenses of a company.

Related: How To Become A Market Research Analyst: A Complete Guide

Competitor-Based Pricing Options

The best competitor-based pricing option may vary depending on a company's scale of operations, product lines and brand recognition. Here are some pricing options, along with reasons a business might choose one over the others:

Set prices below competitor prices

Companies usually choose market prices that are lower than those of their competitors due to one or more reasons. A company may choose to price their products at a rate that is lower than their competitor if they offer a product that is lower in quality. If they initially matched the competitor's price, they may adjust the price by reducing it if they do not meet their sales goals.

Related: What Are Price Monitoring Tools? (Definition And Examples)

Set prices the same as competitor prices

When a company prices its products at the same price as its competitors, it does so to increase sales and maintain a competitive advantage in the market. Companies also set similar market prices to assess if their previous pricing was too high or if there is another factor affecting sales. For instance, they may assess the quality of products, product design, customer care or marketing initiatives.

Set prices above competitor prices

When a business feels that its products are of a higher quality and that customers may pay more for it, it fixes prices above competitor prices. Businesses may also increase market pricing when they are aware that their items are more widely available than those of their competitors. This strategy is ideal for businesses that already have a strong customer base.

Related: What Is Value-Based Pricing? (Benefits And How To Use It)

Tips For Employing Competitor-Based Pricing

These are some tips for employing competitor-based pricing:

  • Lower manufacturing costs before lowering market prices. The cost of production is a major factor in market price. Businesses can benefit from figuring out if they can maintain product quality while lowering manufacturing costs to a level where they can sell products at or below those of their competitors.

  • Assess target customers' needs beforehand. Sometimes consumers do not care about pricing and instead care more about product quality or purchasing from well-known brands. It is important for businesses to consider what factors keep customers re-purchasing and whether competitor-based pricing is necessary.

  • Research multiple competitors' pricing options for similar products. While considering a competitor-based pricing strategy, it is vital that businesses analyse the market prices of additional competitors besides their principal ones. They can then observe price ranges for the same product and determine whether other companies are attempting to match the prices of their larger competitors.

  • Know when to use a different pricing strategy. It is not always necessary for a company to price itself competitively to increase profit margins. To maintain product quality and consumer satisfaction, organisations are required to assess whether different pricing approaches may be more advantageous.

Related: What Is Competitor Analysis? (Plus How To Perform One)

Advantages Of Competitor-Based Pricing

There are several advantages of competitor-based pricing. These are a few ways how competitor-based pricing can benefit a business:

  • Maintains customer base despite competitor offerings. When businesses already have a strong customer base, engaging in competitor-based pricing can help safeguard loyal customers when a competing business sells the same products for lower prices.

  • Levels businesses with their market competition. For businesses trying to accomplish the same amount of brand recognition and customers as their competitors, competitor-based pricing helps convert customers of competitor products to become their own.

  • Provides opportunities for increased revenue. If a business has not seen success with similar products, lowering the market price might help improve sales and deliver higher profit margins.

Disadvantages Of Competitor-Based Pricing

Examine these potential disadvantages of competitor-based pricing to enhance decision-making in a sales or marketing role:

  • High-risk for small businesses: Small businesses may be at high risk if they engage in competitor-based pricing. This is because they may be required to meet their profit margins to maintain operations and reducing product pricing also lowers profit margins.

  • Quality compromises on account of lower manufacturing costs: While lowering market prices to compete with competitor pricing, businesses may reduce their production standards and scale down the quality of materials they use to create their products. This can cause customer dissatisfaction and mean losing valuable customer support.

  • Loss of revenue: Businesses can also potentially lose revenue by lowering their product prices to match those of competitors, especially if they do not see improved sales and lower manufacturing costs.

Frequently Asked Questions About Competitor-Based Pricing

Review these frequently asked questions and answers about competitor-based pricing to help you learn more:

What is the difference between competitor-based pricing and penetration pricing?

Competitive and penetration pricing differ in strategic application and the context of their application. For instance, competitor-based pricing is a strategy that firms use to match the prices of competitor products. Businesses that use competitor-based pricing ‌usually want to expand their customer base and get an advantage over rivals in a sector. In contrast, penetration pricing is a strategy that businesses use to launch new goods or services while significantly undercutting market prices. Setting prices so low that rival businesses may not attempt to enter a market is the primary objective of penetration pricing.

What is competitor-based pricing analysis?

Businesses employ competitor-based pricing analysis as a research technique to assess customer response to the pricing strategies of their competitors. This aids companies in determining how customers might react to price increases or decreases, and whether it might impact consumer spending patterns. Rather than analysing how competition pricing might impact earnings and a company's operations, pricing analysis focuses exclusively on customer response.

Related: What A Pricing Analyst Career Path Is And How to Pursue It

How often do businesses change their competitor-based pricing strategies?

To retain a competitive advantage, it can be beneficial for companies to review their pricing strategy regularly. Business demands and financial considerations determine when businesses can adjust their pricing. Every year, most companies alter their pricing strategies in response to factors like market fluctuations or surplus inventory.

Explore more articles