Competitive Pricing: Definition, Benefits, Concerns & More!

Competitive Pricing: Definition, Benefits, Concerns & More!

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by Alex Noah — 2 months ago in Business Ideas 3 min. read
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Placing the price at the same level as one’s rivals is known as competitive pricing. This strategy is predicated on the notion that rivals have already extensively refined their prices.

Since numerous businesses in every market offer identical or very similar goods, the price of these goods should, in principle, already be at equilibrium (or at least at a local equilibrium) by classical economics.

Thus, a recently established company may save money on price-setting trial and error by establishing the same price as its rivals. Or you can use retail competitive intelligence to accurately set the appropriate price for a product.

But just as every business is unique, so are its expenses. In light of this, the primary drawback of the competitive pricing strategy is its inability to take into consideration the variations in expenses (manufacturing, buying, sales force, etc.) across different businesses. This pricing strategy may thus be ineffective and result in lower profitability.

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The Idea and Benefits

Competitive pricing involves setting one’s rates based on rivals’ prices, which can vary slightly depending on a company’s brand goals, market aggression, and penetration strategies.

This strategy is straightforward since rivals’ pricing is often readily available to the public and therefore simple to imitate. In retail businesses, where items are often identical or substantially comparable, copying rivals’ prices is sometimes a more straightforward approach than implementing a different pricing strategy. By using this strategy, the company lets its rivals bear the expense of setting the best possible pricing.

This is a low-risk strategy. If rival companies’ pricing does not force them into bankruptcy, other businesses in the market will probably experience the same fate. Furthermore, while there is a chance that this approach could result in certain punctual inefficiencies (on a single product), which might later affect the whole market, these circumstances are uncommon.

This process results in balance. Every day, millions of people visit retail stores, and millions of purchases are made there. The market as a whole may thus achieve a stable equilibrium price, supposing that the majority of retail firms are using the competitive pricing strategy.

Competitive Pricing Boundaries

Competitive pricing is only effective when the goods offered to the same clients by many businesses are essentially the same. Conversely, a product’s pricing is rarely transferred to another if the two are just somewhat comparable rather than identical.

In this sense, identifying one’s competitors, proving product congruency, and gathering and evaluating data are the primary obstacles.

Definition of Congruency

According to classical economics as the ability of a customer to substitute a quantity of one product for a quantity of another without sacrificing the utility of the original commodity. In practice, a shop may find it challenging to identify congruency when contrasting its offerings with those of its rivals. Are the final Xbox and PlayStation compatible? The challenging aspect of competitive pricing is defining congruency.

Definition of Competitors

To determine which prices the company needs to evaluate, it is essential to define the competition. For example, a physical and online shop may not always be rivals, because their target markets differ somewhat, it is impossible to consider pet food vendors operating online and offline as rivals. But book or magazine sellers are catering to the same clientele, both online and offline are probably rivals.

Data Collection and Analysis

After rivals and congruent items have been identified, the following stage is to gather pertinent price information. The majority of rivals’ pricing is, in one form or another, posted online and is “scraped” with the right tools. Since scrape frequency varies greatly across different business sectors, it must be specified. While prices may fluctuate virtually every minute on Amazon, most businesses do not adjust their pricing that often.

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What are the Primary Concerns with Competitive Pricing?

  • Competitive pricing can lead to lost opportunities and stagnant markets, potentially triggering a race to the bottom or a pricing war. This is because all market participants may use the same price blindly, resulting in a stagnant market and potentially causing a suboptimal profit.
  • Competitive pricing is widely used in the industry, causing the market to become stagnant and causing a decrease in profit margins. An aggressive pricing strategy, combining penetration and competitive pricing, can result in a race to the bottom, as the market price gradually drops if another rival follows suit, causing a suboptimal new equilibrium.
  • A race to the top can also result from competitive pricing. For example, web crawlers using the Amazon Market Place may resell shirts that are “limited edition” for a higher price, profiting from the higher price if a consumer is willing to pay. This leads to web crawlers setting their own higher rates, causing other web crawlers to use the competitive pricing strategy to establish their own higher rates, resulting in a race to the top.

Conclusion

Competitive pricing is a subtle technique that requires careful navigation, despite its first appeal due to its simplicity. Complicacy is introduced by the search for congruency and precise competitor identification, along with difficulties in gathering data and possible dangers in broad adoption. The strategy’s strength is clear as organizations struggle with its nuances, but success requires strategic expertise.

Alex Noah

Alex is senior editor of The Next Tech. He studied International Communication Management at the Hague University of Applied Sciences.

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