Chances are, we all know someone who’s a little too competitive.
There’s always that one person who treats a friendly round of Mario Kart like the Indy 500, or pickup basketball like game 7 of the NBA Finals, or the company kickball game like there’s a million-dollar payday at stake.
And while being overly competitive in most aspects of life doesn’t usually yield the rewards the effort suggests, there are times when being a little competitive and strategic can pay off big for your ecommerce brand—especially when it comes to pricing strategy.
A competitive pricing strategy is one in which brands price products based on comparable competitors. Different competitive pricing strategies may price products lower than, equal to, or higher than the competition.
Competitive pricing can be an effective strategy for preventing loss of market share and increasing profits. In this article, we’ll examine the different types of competitive pricing strategies, and then we’ll look at the pros and cons of using them in ecommerce.
Types of competitive pricing strategies
While there are many variations of competitive pricing strategies, they may broadly be grouped into three types: pricing lower than the competition, pricing higher than the competition, and pricing equal to the competition.
Pricing lower than the competition
When you price your products lower than the competition, you appeal to budget-conscious shoppers. You may be able to offer lower prices without losing profit or sacrificing quality by taking advantage of economies of scale.
You don’t necessarily need to have the very lowest price of any comparable product. Your market segment might be flooded with cheap knockoffs of abysmal quality, and you wouldn’t want your products associated with those. Instead, you can identify the competitors closest in overall quality to what you have to offer, and then price your products lower than those close competitors.
Alternatively, you could offer certain products at lower prices as loss leaders. In this case, you accept a profit loss in one area in order to acquire customers that you then profit from in other areas. This could be as simple as offering a quality product that builds brand awareness and makes customers want to come back for more. Or it could be an inexpensive initial product that requires customers to make additional purchases for continued use. For example, you might sell printers at a loss expecting to recoup profits via ongoing purchases of proprietary ink cartridges. Or your product may have numerous accessories. It may also complement other products in your catalog, making for easy upsells.
A related variation on this strategy (and one particularly well-suited to ecommerce) is to offer a steep discount on one product as an incentive for customers to start a subscription to a related product. For example, the coffee brand Gevalia has for years offered highly discounted (and at times even free) coffee makers to shoppers who sign up for a new coffee subscription. It can be a great way to get new people in the door who stick around because they love what you offer.
Pricing higher than the competition
When you price your products higher than the competition, you appeal to shoppers who prioritize quality over price, as well as those who enjoy the status of purchasing “premium” products. Higher prices can actually come with a psychological advantage. In many cases, customers automatically feel that a product must be of a higher quality simply because it is priced above the competition.
Of course that doesn’t mean you should simply give an inferior product a high price and call it a day. Even if you get some initial sales that way, negative reviews and word-of-mouth warnings will quickly catch up with you and negatively impact your brand’s reputation. Truly premium products need to earn their place by proving their value.
If you’re going to price above competitors, be prepared to not only offer a quality product, but explain what makes your offering more worthwhile. Do you use better manufacturing techniques? Does your product have better specs or offer more features? Is your brand more intentional about ethical practices? Let your customers know why your product is worth a higher price.
A variation of the higher pricing strategy is price skimming. With price skimming, you initially release your product at the highest price you expect customers to pay, and then you gradually lower it over time. In this case, customers who are willing to pay the initial premium price are early adopters who want to be among the first to receive a new offering. This strategy is frequently used with tech devices, such as smartphones.
Pricing equal to the competition
When you price your product equal to the competition, you don’t appeal directly to budget or premium shoppers, but neither do you carry the risks of devaluing or overvaluing your brand. Instead, you focus on finding other ways to set your offerings apart.
You may engage in creative marketing campaigns, offer unique experiences, and invest in shopper marketing strategies to make your product stand out from the crowd. And just as you would when pricing higher, you’ll want to be sure to highlight any areas where your product surpasses the competition in quality, features, or manufacturing techniques.
Another option for equal pricing is price matching. With price matching, you offer shoppers the chance to purchase your product at the same price as a competitor’s product if they can show that the competitor’s price is lower. This strategy can help you avoid losing the sales of budget-conscious shoppers. However, it works best for homogeneous products—being essentially identical and having no unique characteristics or distinguishing features.
Pros of competitive pricing strategies
Brands use competitive pricing strategies to prevent market loss, to increase profits, and because it’s a simple and low-risk strategy.
Competitive pricing can prevent market loss
Price is one of the most important aspects a shopper considers when they make a purchasing decision. You could have the most amazing products in the world, but if shoppers don’t think your prices are competitive, then they’re likely to take their business elsewhere. Competitive pricing strategies ensure your prices are set with an understanding of the market.
That doesn’t mean your prices always need to be the lowest—remember that competitive pricing can be below, above, or equal to the competition—but it does mean your prices ought to be within the ballpark of price ranges your customers are willing to pay. And to the extent that your prices are higher than your competitors’, you’ll need to justify that difference with added value.
Competitive pricing can increase profits
Whether you price products below, above, or equal to your competitors’ products, each approach has the potential to increase profits.
For pricing above the competition, the reasoning is pretty straightforward. If customers are willing to pay more for your products, then you’re able to make a greater profit on each sale you make.
For pricing equal to or below the competition, you’re relying on economies of scale. You want to find the sweet spot where you’re able to make as many sales as possible in order to boost overall profit margins, even though you’ll be making less profit per sale.
Alternatively, you may price select products lower than the competition to act as loss leaders for the other products you offer, accepting a profit loss in some areas in order to increase profits for your brand as a whole.
Competitive pricing is simple and low-risk
Competitor-based pricing models require fairly little effort to set up. Whether you’re attempting to price your products above, below, or equal to the competition, there isn’t much research you need to do apart from learning your competitors’ prices and setting yours accordingly.
And regardless of which of the three strategies you use, you’ll be setting your prices competitively in relation to the window of acceptable prices consumers are used to paying. So you’re not likely to lose customers with a price that’s too far off the mark. The possible exception to this would be with the higher-pricing strategy—be careful not to price too far above the competition without sufficient justification for the difference in price.
Cons of competitive pricing strategies
Potential drawbacks of using a competitive pricing strategy include the ongoing maintenance it requires, the risk of devaluing your products, and the fact that it doesn’t stand alone.
Competitive pricing requires ongoing maintenance
Your competitors’ prices aren’t set in stone. So if you’re basing your prices on theirs, you can’t simply set it and forget it. You’ll have to monitor your competitors, note any changes they make to their prices, and change yours accordingly. Otherwise, they may simply undercut your price and nullify any advantage your pricing strategy had given you.
You don’t necessarily have to do all this by hand. Repricing software can automatically track and analyze your competitors’ pricing data in real time, making it easier to keep up with the competition.
Competitive pricing can devalue your products
This particular drawback depends on which of the competitive pricing strategies you use. You probably won’t devalue your products by pricing them higher than the competition, but you can risk devaluing them by pricing too low—whether they’re priced lower than the competition or priced equally to inferior products.
We mentioned earlier how higher prices can have the psychological effect of making consumers feel that a product is of superior quality, but the inverse can also be true. Some customers assume that products with lower prices must be of lesser quality, even if that isn’t the case. So give plenty of thought to which strategy you’re going to use and what effects it may have on consumer perception of your brand.
Competitive pricing doesn’t stand alone
It might be tempting to think that you can simply pick a pricing strategy, set your prices accordingly, and be set. But there is a bit more to it than that. Offering competitive prices is one part of the puzzle, but you still have to get your products in front of customers for them to see what value you offer.
This is especially true for direct-to-consumer brands, where you have to bring customers to your own website. Brands that sell on third-party retailers have the potential advantage of being found when customers sort products by price. But regardless of how you get your customers’ attention, you’ll still need to demonstrate why your prices are competitive for what you have to offer.
Additionally, no competitive pricing strategy should be indiscriminately followed regardless of what the market does. It may be your intention to offer lower prices than the competition, but you have to use discernment.
What if you and a close competitor both commit to underselling each other? You can’t both afford to continue lowering prices forever, and you may eventually have to settle into a price that is acceptably low, even if it isn’t quite the lowest. Alternatively, what if your competitor makes a mistake that temporarily gives their products away for far less than their worth? You probably don’t want to follow them there either.
Keep track of your prices across retailers
Whatever pricing strategy you implement, it’s important to ensure that all sellers stick to your pricing policy. If sellers undercut your prices, they throw your carefully planned strategy out the window, and risk devaluing your brand. And when one seller starts, others are likely to follow.
But manually tracking retailers takes up resources that could be better used elsewhere.
That’s where PriceSpider’s Prowl solution comes in. We automatically monitor your products across all retailers and more than 20 marketplaces, ensuring your prices remain consistent wherever they appear. And we offer a streamlined MAP enforcement process to help you address pricing policy violations.
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