|One of the most confusing and mystifying aspects of opening a retail store or starting to sell products online is figuring out how to price products. There’s a lot to consider when it comes to pricing. Are customers willing to pay what I’m asking for? Am I charging too much? Am I not charging enough? Can I afford to discount my prices? How do my prices compare to those of the competition?. Here is Pricing Demystified: The Competitive Pricing Strategy.
We’re going to fill you in on a pricing strategy that centers around that last question. A competitive pricing strategy revolves around what your direct and indirect competitors are charging for comparable products and services.
In this guide to comparative pricing strategy, you’ll learn:
What is a Competitive Pricing Strategy?
When you use a competitive pricing strategy (also known as a “competition pricing strategy”) to price your products, you set prices based on how much your competition is asking for similar products, rather than on internal factors like cost of goods sold or profit margin.
This approach doesn’t always mean matching competitors’ prices or selling products for less than the competition. You can price your products higher than the competition when using this pricing strategy. Here’s a closer look at the three approaches to competitive pricing strategy:
A competitive pricing strategy is just one of many pricing approaches. Alternative strategies include:
Pros and cons of implementing a competitive pricing strategy
Weigh the advantages and disadvantages of a competitive pricing strategy before implementing it as part of your retail business plan.
Pros of a competitive pricing strategy
Using a competitive pricing strategy is simple. Beyond doing some competitive research and deciding whether you want your prices to match, cost less, or cost more than the competition, there isn’t a ton of number crunching involved with this approach.
When your prices are lower than or equal to competitors’ prices, you can attract new customers and steal customers away from the competition. While you may lose profit on some items, you could gain loyal customers who will continue to spend with you. In that respect, competitive pricing can act as a loss leader.
A competitive pricing strategy can help you position your products and business relative to the competition. For example, if your prices are much higher than competitors’, then your perceived value will be higher than theirs and attract customers who look for quality instead of price. If your prices are lower, your perceived value will be lower and you’ll attract customers who seek price over quality.
Cons of a competitive pricing strategy
When a competitive pricing strategy is used for price matching and to offer prices lower than that of the competition, you can end up in a race to the bottom in which both you and your competitors reduce prices to beat each other. Ultimately, you may not be profitable and your business could go under.
This take on a competitive pricing strategy also tends to attract price-sensitive customers. You’ll have to work harder to gain the loyalty of this audience, as they tend to shop wherever they can get the best deal.
Finally, if you only base prices on the competition and not on your company’s finances (such as what it costs to manufacture or buy the products in question), your business may not be profitable enough to operate long term.
Here are several real-world competitive pricing examples to help you better understand this approach.
Example of higher competitive pricing: Lululemon
Before Lululemon penetrated the market, it was difficult to imagine anyone but a professional athlete willing to spend more than $100 on a pair of leggings. By charging much, much more for its workout apparel than the competition, Lululemon elevated gym clothes from something people only wore to the gym to a stylish status symbol. Lululemon used a competitive pricing strategy to pioneer athleisure and become the go-to for premium workout and lifestyle apparel.
Example of equal competitive pricing: Best Buy
From Amazon to big box stores and independent electronics stores, Best Buy has a lot of competition. By offering a Price Match Guarantee, Best Buy reduces its prices to match competitors’ prices if they offer a better deal on an identical item. This price match policy applies to both online and in-store purchases. By doing so, Best Buy can keep loyal customers from taking their business to the competition.
Example of lower competitive pricing: Quince
Quince is an e-commerce retailer that sells “high-quality essentials” for “radically low prices.” The brand’s marketing strategy is centered around the fact that it cuts out the middleman and charges less than the competition for luxury products such as leather bags, fine jewelry, and silk bedding.
Quince has positioned itself as the attainable source for the finer things in life. One of the ways it does this is by placing its prices next to “traditional retail” prices on its product pages to make you feel like you’re getting a good deal. For example, Quince charges $149 for a genuine leather jacket. On the jacket’s product page, you can see competitors’ prices: $489 at AllSaints, $895 at Maje, and $995 at Rag & Bone.
How to evaluate the success of a competitive pricing strategy
As with anything else in business, it’s important to evaluate how well a competitive pricing strategy is working for you. Point-of-sale (POS) system reports can give you insights in real-time. Monitor these key performance indicators through your retail POS on a regular basis:
Wrapping up: Competitive pricing strategy demystified
Figuring out how much to charge for products is one of the biggest challenges retailers face. There are so many factors to consider: what competitors are asking for, what customers are willing to pay, what kind of a profit you can earn… the list goes on and on.
A competitive pricing strategy is one approach that involves setting prices based on the competition. You can choose to charge more, less, or the same for similar or equivalent items to attract a certain kind of clientele. No matter how you determine your prices, it’s important to evaluate your strategy’s success.
Rely on smart and updated restaurant POS software and the right people to manage your business operations smoothly while you prepare for the next steps of your business.
Don’t forget to follow us on Instagram for more restaurant trends and updates!