One of the primary defining factors that may determine a business’s success is its pricing strategies. After all, assuming that the price of a product is among the top concerns of a buyer is almost always correct. On the other hand, a poor approach could result in a fast track towards wasted profits and dropping sales, meaning the importance of getting the price right cannot be understated.
What is competitive pricing?
Simply, competitive pricing could be described as the fine line between maximizing profits and offering attractive products to consumers. A consideration and comparison of competitors is a crucial aspect of pricing as well. Overall, achieving the perfect middle ground mentioned above is essential for businesses that sell everyday products. Therefore, an appropriate pricing strategy is especially relevant for firms that sell common goods, i.e., products which remain very similar even when sold by different companies.
The key point you should aim to take away from this article is realizing which competitive strategy is relevant for you.
Factors that affect retail pricing
While competitive pricing as a topic is rather encompassing and sometimes even vague, it can usually be categorized into two different parts – external and internal factors.
This section discusses factors that come from within an organization. Some essential parts are:
1. Organizational factors
A duo of management levels often decides them. Top-level managers look at price ranges and policies while the lower-level staff is responsible for the distinct price.
2. Marketing mix
Consisting of seven P’s (product, place, promotion, price, process, people, and physical evidence), it’s a combination of these different parts to make up an efficient way to attract customers. Since gaining customers’ notice is crucial to any business strategy, this part should not be overlooked.
3. Product differentiation
With massive, often oversaturated markets worldwide, it is becoming rarer and rarer to create a totally unique product. Therefore, differentiating in ways like quality, color, and features becomes an essential way to stand out while also allowing for a potential increase in pricing.
4. Product cost
Arguably one of the more obvious points of price determination, it aims to consider a combination cost. This includes raw materials, wages for laborers, promotion, advertising, and salaries. Any price set below these combined costs would result in a loss.
External factors are outside the control of a company. As such, they are often industry-wide and are essentially relevant for any firm. Interestingly, while outside a single company’s scope, they are, nevertheless, factors that can be predicted with both appropriate plans and market forecasts. The primary external factors are:
Inelastic and elastic are two ways demand can be categorized. Inelastic products/services, due to their stable nature, can allow themselves to have a higher but constant price. On the other hand, elastic products can shift rapidly and, therefore, don’t have the luxury of having a stable, high price.
Whether a market is monopolistic or not will significantly affect pricing. A monopoly may allow for an overpriced product to exist, while in a competitive market, too high of a price may be the sole reason why a firm’s strategy fails, meaning case-specific, appropriate competitive research must be done before the pricing decision.
Availability of supplies directly affects how steep a price might be. Scarcity of raw materials, especially when combined with high demand, can result in prices shooting up massively, yet within bounds that are nevertheless profitable. The exact opposite can be said for products based on abundant material. If we were to look at a competitive market instead of a monopolistic one and take the example of a firm that sells high-priced goods made from common raw material, then, unless the company offers something truly unique about their product, the high price would be unsustainable.
Overall, it is crucial to understand these basic concepts as they allow you to better predict and prepare an effective sales strategy while also avoiding detrimental losses. Though it should be noted that while external and internal factors are universally seen as essential measurements, their sub-sections should be treated more on a case-by-case basis.
What are the types of competitive pricing?
Similar to the factors mentioned above, choosing what type of competitive pricing is relevant to you should be based on your personal requirements. Whichever specific goal you may have, be it price penetration or gaining market shares, an appropriate type must be considered. Such considerations are especially relevant today with globalization and its byproduct of massive international competition. So, taking this into account, three primary types will be looked at:
1. Cost plus pricing strategy
Easily the most simplistic choice of all 3, it adds a prefixed profit margin (a.k.a a markup) over the cost, which then becomes the selling price. It’s probably not difficult to see why this choice is suboptimal. Essentially, this is what you may choose to do if there is a severe lack of pricing research done. So, in short, it’s unlikely that your competitive advantage will be formed around a pricing type based on a lack of data/information. Thus the cost plus pricing strategy should only be taken as a last resort.
2. Demand pricing strategy
As the name suggests, the price of this strategy directly correlates to demand. The goal of this approach is to maximize sales in those peak moments, where price and sometimes even volume can both be high. Imagine concert/festival tickets, for example. As the event draws near, they may jump significantly in price to maximize ticket sales profits.
3. Penetration pricing strategy
A market through this strategy is entered through a lower price than the competition. The primary aim is to generate demand and establish yourself in the market enough to a point where a more profit-focused pricing strategy can be accepted. Temporary loss while in the market entry period is a common occurrence.
Benefits of competitive pricing strategies
Competitive pricing has been examined, its main factors and types have been discussed, but a major point remains to be overviewed. What are the concrete, main advantages of having an efficient, competitive pricing strategy? Increased profitability is undoubtedly one of them, but there are other, arguably, more important benefits as well.
1. Market loss prevention
Adapting your approach to changing market conditions is a prime example of the usefulness of competitive pricing strategies. Keeping an eye on your competitors and fluctuating prices accordingly is another method of reducing market loss. Overall, it’s a way to prevent consumers from leaving your brand while also enabling the retention of your market shares.
2. Improving profit margins
As mentioned initially in this section, it is unsurprising that a finely-tuned pricing strategy can effectively maximize profits. However, the complexity of this maximization comes from the plethora of things that may influence a business atmosphere. Elasticity, level of competition, current market shares, product uniqueness, and many other factors may contribute to what specific strategy should be chosen. So, while the idea that competitive pricing strategies could improve profits is almost self explanatory, the actual implementation of said strategies is not.
3. Ability to have dynamic pricing
In a way, it is the exact opposite of a cost plus pricing strategy. Dynamic pricing is an idea that you can achieve the optimal competitive advantage through complex, constantly monitored, and changing pricing strategies while gaining maximum profit. Although arguably one of the more sophisticated benefit-generating approaches, it does have the ability to take your business to the next level. The use of tools, in such cases, is usually highly encouraged, especially when one considers that nowadays, literally millions of price changes happen daily. Numbers of such proportions are effectively impossible to track without an appropriate tool.
Much like profit generation, efficiency is somewhat vague and encompassing. However, when it comes to price, it can be defined as this – a combination of an effective pricing strategy with several other strategies that can result in many benefits. Whether it is simplified/automated pricing processes or simply a slight but constant increase in customer retention, efficiency is crucial for an effective competitive pricing strategy.
Considering the data-driven nature of e-commerce decision-making, getting publicly available data nowadays becomes one of the primary ways to calculate significant portions of the otherwise unavailable information. This can really help you establish that your price is right.
And finally, whether you’re looking at type or any other part of pricing strategy, diligence, scrutiny, and high degrees of research must be conducted. Pricing, as discussed before, can be impacted significantly by so many minuscule processes and parts, some of which are out of your control, that accurately determining what is right for you could be the one thing that determines if you’ll achieve profitability or loss. If you are curious to learn more about price and some of its unique aspects, such as dynamic pricing, check out our blog.