Consumers take many factors into consideration when deciding which products or services to buy. One of the biggest factors is the retail price. Shoppers want to make sure they're always getting the best deal when considering which retailers to buy from. This is particularly true for e-commerce products. Consumers search the internet far and wide on Google and Amazon to get the best prices. Who doesn't love a bargain?
Therefore, to increase your profits as a business owner, you need to have a clear understanding of how to use the best pricing method for your business. From dynamic pricing and penetration pricing to cost-plus pricing and value-based pricing, there are many strategies to choose from. However, if you want to increase your profitability, you'll need to pick a pricing model for your business that will fare well in a competitive market. Time and time again, competitive pricing strategies have proven to be an apt way to increase sales for any business.
Competitive pricing strategies consider the pricing methods of competitors' products to set price-sensitive points that appeal to potential customers. If your product prices are too high, consumers might go to a competitor with a better offer for a lower price. If your products or services are charged at a price that's too low, you risk losing revenue. Charge prices equivalent to your competitors' pricing and your profits might also be negligible.
In other words, if you choose the wrong high price or low price, it's easy to become lost in a crowded market. To ensure that your business has a sustainable return on investment and to protect your market share, the key is to set your prices based on an effective competitive pricing strategy. The best way to find that price sweet spot is through consistent trial and error. Luckily, a good competitive pricing strategy will help mitigate the potential of your business from suffering any losses throughout the process.
This article will help you discover how to price your products or services through a competitive pricing strategy.
What Is Competitive Pricing?
Competitive pricing is a business strategy that entails choosing specific price points that strategically place your business product or service at an advantageous price relative to market competition. In other words, competitive pricing is when a business takes its competitors' prices into account when setting prices for similar products or services. While production and other overhead costs are still considered, the priority of this strategy is relative to competition-driven prices.
This strategy is best for businesses that operate in a crowded industry space wherein multiple companies offer similar products or services. It's an easy way to get a leg up on your competitors. Typically, a pricing strategy is implemented when a product or service reaches market saturation, and there are many substitutes or alternatives on the market that your customer base can turn to instead of your business. If your product or service has reached market equilibrium (where your supply and demand are equally balanced), you know it's time to start planning a competitive pricing strategy for your business.
How to Apply a Competitive Pricing Strategy
Now that you have a better understanding of what a competitive pricing strategy is, you're ready to create one for your business. Approaches to finding the right price for your products based on a competitive pricing strategy can vary, but to help get you started, we've simplified the process. Use this easy three-step guide to plan the best pricing strategy for your products or services.
Conduct a Market Analysis of Your Competition
The first step to implementing a competitive pricing strategy is to conduct market research on how your business fairs within the industry. You'll want to collect detailed data on both the historical and anticipated pricing of your competitors in the industry. From there, you can start to evaluate the best range that your pricing will fall within.
Competitive pricing analyses can be produced by statistical software that tracks the pricing data of competitors. Competitor price tracking software will monitor the market for trends in pricing. These tools can also be a useful resource for predicting future pricing trends for a particular product or service on the market. This can help you prepare for making price adjustments as needed throughout the year, as price ranges for particular products or services can fluctuate depending on various factors.
Price Your Products or Services at the Best Price Point
Once you have your detailed market analysis, you can use the pricing trends to consistently keep your prices at the best point that will increase your revenue. As competitors similarly adjust to consumer and market trends, you too can promptly respond to the market and even anticipate future trends.
When setting prices within this strategy, a business has three options. You can set prices for your products or services above competitive prices, below competitive prices, or on par with competitive prices. Each of the three options requires different factors for consideration. While one approach might work well for one particular product, another might be better suited for a different product. It all depends on how the market reflects what consumers will pay for a product or service at a given point in time.
- Above competitive prices: This is best for a business that has unique features or is of high-end quality. These types of businesses can set their products or services apart from similar competitors through higher prices, like Apple, and raise the perceived value of the brand by selling for premium prices (also known as premium pricing).
- Below competitive prices: This is best for a business that is willing to risk the possibility of a profit loss based on the probability that more consumers will opt for the below-market markup (also known as a loss leader strategy or price skimming).
- At competitive prices: This is best for a business that would rather sell at market price points and implement stronger marketing strategies to stay competitive, such as through price matching offers or promotions for new products.
Continue to Adjust Prices Based on the Market
Throughout the year, you'll want to conduct frequent market price analyses to ensure that your prices are set at the benchmark optimal level. The behavior of your competitors will consistently play a critical role in how you set your prices and will help you make better operational decisions in the long run. You can offset price wars by preemptively setting your products at the right price. Continuously adjusting prices to the market will also help ensure your sales volume remains strong and that the incurred total cost of your cost of production and overhead fees are offset by intelligently priced products.
In addition to your competitive pricing strategy, you'll want to make sure that you also implement strong marketing strategies to help expand your market reach. Consumers don't only look at the price tag before making a purchase. You want your business to keep a competitive edge with quality products or services and strong customer engagement. Keep your customers happy, and your value as a business will increase.
The more strategies you use to improve your business, the better your profit margins will be.
Organize Your Business With Skynova
As your business grows based on having the best prices, make sure to use the best accounting practices to streamline your business operations. Learn more about how Skynova's accounting software, business templates, and other software products can help you keep accurate financial records with ease.
From online invoicing for small businesses to accounting software, Skynova is here to help your business stay organized.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a pricing expert or a professional accountant to ensure that you're meeting accounting standards regarding revenue, taxes, and other financial procedures.