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Competition-Driven Pricing – Definition

Cite this article as:"Competition-Driven Pricing – Definition," in The Business Professor, updated February 29, 2020, last accessed August 8, 2020, https://thebusinessprofessor.com/lesson/competition-driven-pricing-definition/.

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Competition-Driven Pricing Definition

Competition-driven pricing refers to a pricing strategy in which the seller considers the price of competitors when setting prices for similar products or services. In this type of pricing, the focus is put on competition and not on production and overheads.

In other words, it focuses more on how prices of products or services will achieve the most profitable market share. Another term for this is competition-oriented pricing or competitive pricing.

A Little More on What is Competition-Driven Pricing

Competition driven prices are focused on the market. The pricing of a product is determined by the pricing of other products or services in the market. So, when the seller wants to set price for its goods, it will consider that of its competitors in the market. Note that prices between rivals may not be similar. It is because there is a possibility of a competitor lowering the price of its goods or services.

Competition-Driven Pricing Considerations

There is a need for businesses to conduct in-depth research before engaging in any competitive pricing approach. For a business to comfortably determine whether the strategy of competitive pricing is right, it has to answer the following questions:

  • What its position in the market is
  • Who its target market is
  • What its position in the market is compared to its rivals

Another essential consideration for a business is the cost of product versus profitability.  It is important for a business to determine how it can attain a bigger market share with minimal losses. It means that the focus should be not only on obtaining a good market share but also on achieving the highest profit margins.

Competitive Pricing Options

Generally, the product prices of your competitors are what you use as a benchmark for setting your own products’ prices. After a deep analysis of your competing services and products, you can take one of the following pricing options:

Price Below Competition

Customers love when they are able to get services or products at a low price. It is, therefore, a good strategy for a business to price its products below that of the market. It attracts a significant number of customers, hence increasing sales. However, ensure that you don’t compromise your profit margin when you decide to reduce your prices.

Price above the Competition

It is also knowns as premium pricing. If you have a feeling that your products are of quality, compared to that of your rivals, then this pricing strategy may work well for you. Note that there must be a reason behind your premium pricing. You must-have products that stand out from that of your competitors. A good example that can justify your higher price is when you improve your product or add a new feature to it.

It is important that customers be able to identify the premium quality of the product to develop the willingness to spend extra dollars on the product. This strategy works well for those businesses with strong brands and an established reputation for their products.

Pricing at the Same Level

It is also known as price matching. It is where a business decides to offer pricing that matches that of its competitors. Note that the product features may be similar, but the focus shifts on added value.

Since there is a lack of price difference, you need to put into consideration other benefits that will make a customer choose your product over that of your competitors. If you don’t have anything to set your product apart from the rest, then the chances are high that you will lose your business.

A good example of a benefit that can give you a competitive advantage is giving an extended warranty for your product. With this, it is easy to gain a significant number of market share.

Reference for “Competition-Driven Pricing

https://www.investopedia.com › Small Business › Entrepreneurship

mrpricing.com/pricing-methods/competition-driven-pricing/

https://www.thebalancesmb.com › Operations & Success › Marketing › Glossary

https://www.mbaskool.com › Concepts › Marketing and Strategy

https://www.shmoop.com/finance-glossary/competition-driven-pricing.html

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