Competitive Pricing Guide: How to Price Competitively

Competitive pricing is a business strategy that involves pricing a good or service at the same price—or a comparably higher or lower price—as a direct competitor selling the same product. Typically employed when the price of a commodity reaches equilibrium, businesses use this tactic to maximize their market share of a particular product and gain a competitive edge on similar firms.

A properly employed competitive pricing strategy can help a business grow its customer base and increase sales, attracting buyers in pursuit of the lowest possible product prices, or goods that are more premium than others.

Several pricing methods fit under the umbrella of competitive pricing, including:

1. 1. Above-market pricing: Also known as premium pricing, this strategy involves setting a higher price for a product than the competitive market average. It often works best in conjunction with an elite brand or marketing strategy, successfully convincing new customers that the product in question is of a higher quality than the competitors’ offerings.
2. 2. At-market pricing: The most straightforward way to apply a competitive pricing strategy is to set a new product’s prices to match the average market price of a similar product. One typical example of this is the price-matching strategy often seen on e-commerce platforms. If a retailer can’t beat a competitor’s price, they may be willing to do so for individual sales.
3. 3. Below-market pricing: When pricing a new product or attempting to penetrate a new market, retailers may opt for a below-market pricing strategy (also called loss-leader strategy). Setting the product at a low price—even just during the initial launch—attracts many potential customers, optimizes early sales numbers, and creates opportunities to sell additional, unrelated products.

Here are some examples of the possible advantages of a competitive pricing strategy.

1. 1. Attracting new customers: This strategy can help businesses break into crowded markets full of near-identical competitors. If distinguishing a product by other means (like through promotions or marketing) proves too difficult, competitive pricing is often the best option.
2. 2. Encourages market stability: If most businesses in a specific market price their products congruently with competitors, it prevents one company from dominating the market, encourages equilibrium, and stabilizes prices, all of which are beneficial for both buyers and sellers.
3. 3. Low-risk nature: Competitive pricing creates a straightforward price range for a new business’s products. If it’s clear that the target audience is willing to pay a specific amount of money for a given product, the business can be sure that congruently pricing their products will lead to sales.

Competitive pricing also has its downsides, including:

1. 1. Fixed cost issues: Especially for small businesses that can’t lower their fixed costs as much as larger firms, competitive pricing can create a situation wherein the high cost of production makes matching larger competitors’ prices impossible or unprofitable for small businesses.
2. 2. Price wars: Attracting customers using only a competitive pricing model can result in an ecosystem where every business competes to charge the least, collectively lowering the entire market’s profit margins.
3. 3. Pure popularity: Creating the lowest price is a fairly obvious strategy that likely doesn’t guarantee memorable differentiation in the eyes of your target market. Pricing decisions should always occur in conjunction with branding and marketing pushes to distinguish a product in other ways.

Creating your own pricing strategy requires detailed market research and shrewd decision-making. Follow these steps to create a competitive pricing strategy for your product.

1. 1. Gather pricing intelligence. Especially with the ubiquity of e-commerce outlets, culling pricing data for a specific product has never been easier. Start by researching competitive businesses selling similar products and compiling data on their pricing. From there, you can begin to evaluate where your product fits among the competition.
2. 2. Find market gaps. You don’t necessarily want to go for the lowest possible price if a currently underserved market is looking for a premium product. Figure out what the market is missing, and use that information to inform the strategy of what sets your product apart.
3. 3. Set your price. Using data you’ve found in your market research, set a price for your product, and plan a roll-out based on what makes the most sense for your market penetration plan.
4. 4. Support your pricing with marketing. Price alone is rarely enough to sell a product, so ensure your pricing decisions go hand-in-hand with how you’re marketing your product.
5. 5. Adjust as needed. Regular price monitoring will help you navigate changes in the market and establish dynamic pricing models. Shifting your product’s prices to mirror how your competitors are adapting is essential to maintaining a competitive edge.

Get the MasterClass Annual Membership for exclusive access to video lessons taught by business luminaries, including Sara Blakely, Chris Voss, Robin Roberts, Bob Iger, Howard Schultz, Anna Wintour, and more.