When choosing product prices, you will need to incorporate various pricing methods in your retail strategy. Finding a price that fits your and your customers’ needs can be challenging, but many methods exist to help retailers price their merchandise fairly and appropriately.
The sustainability challenge
Competitor-based pricing is one of the three most commonly used price-setting methods in retail. In this strategy, you base your prices off of your competitors. Most companies use this method to become the lowest-cost option on the market, relying on increased sales to make up for lost revenue. Premium brands, on the other hand, might purposefully raise prices to foster exclusivity. The most common iteration of competitive pricing is price match guarantees, where retailers will lower prices to those of competitors if a customer provides proof.
Savvy retailers can employ this pricing method carefully to clear inventory and drum up foot traffic, but they should ensure that their strategy is sustainable. The following page will teach you how to use competitive pricing wisely in your store.
How to Use Competitive Pricing
In competition-based systems, you use data from your competitors to set your prices. You will pull information from your competition, and you will perform an analysis of their price points for the product in question. From there, you can set your price to achieve your goals.
Companies will often use this system in three circumstances. First, a company might choose to use competition data to enter the market as the lowest cost offering. This strategy might be employed by a new retailer that seeks to gain more market share. Dollar Shave Club, for example, became successful by undercutting prices for razorblades. Although you will need to eventually move your customers to higher-cost options, undercutting competitor prices can be an effective strategy to garner attention for your business.
Another way that companies employ competition-based pricing is by offering price matching. Major retailers like Wal-Mart and Home Depot will honor a competitor’s price if it is lower than their own. This strategy can be effective because only a handful of consumers will check prices across retailers. You can benefit from being the lowest-cost offering without lowering prices for all customers.
Other brands might use competitor information to position their product as a premium offering. A high-end watch brand, for example, might examine market prices to set their price point on the higher end to indicate quality. However, for this strategy to be successful, you must be an established luxury brand, and your product and service must match the cost you set.
Benefits of Competition-Based Pricing
Most businesses that use this method do so for three reasons. One of the largest benefits of competitor-based pricing is that your prices will usually be typical for your market. If consumers are paying a similar amount at other retailers, then they will understand if your prices fall within that range. This is especially true for saturated markets, such as housewares or apparel. When you have plenty of available data, you can easily find a price point that makes sense.
Competition-based pricing strategies also offer a simple, fast approach to setting prices. This pricing model is straightforward, so it’s easy to make a determination by looking at the data. Further, by using competitor information, you take advantage of the research that those companies have already performed on their markets and prices. Competitive price setting can be a good approach for companies who need to get their product to market quickly.
Finally, your company can use competitor-based pricing strategically to pressure the market and drive traffic. Returning to the example of Dollar Shave Club, this company successfully pressured many shaving brands to lower their prices to compete. Likewise, many retailers will lower costs of individual items below market to move inventory, which often happens when an item is marked for clearance.
Drawbacks of Competition-Based Pricing
Prices based on competition data can benefit your business, but this strategy does have three major disadvantages. Competitive prices only focus on external factors, and compared to other strategies, this one is far more effective in the short-term. This makes competition-based prices less-than-ideal for many companies.
The largest problem with this method is its exclusion of internal variables, such as labor and supply chain costs. All businesses have various expenses that detract from their overall revenue, and these often vary among companies. For instance, an older store might have secured a great deal on rent in an upcoming neighborhood, and new stores in the area typically have to pay far more. However, competitor-based pricing does not account for these differences. So, if you match the price of a retailer with incredibly low overhead costs, then you will likely lose revenue.
Competitive prices also make you more vulnerable to external influences. By basing your price on another company, that competitor can pressure you to further lower prices by lowering their own. Therefore, any competitive advantage that you gain from lower prices might be short-lived if the competition responds by continuing to drop theirs. On a broader level, if a sector relies too heavily on a competition-based system, then its prices may lose touch with consumer demand. This can lead to a race to the bottom that will harm your business’s bottom line.
Finally, competition-based prices are often unsustainable as a long-term strategy. Cutting an item’s price to match a competitor might temporarily get consumers’ attention. However, lower prices can hurt your profits in the long term, and they can undercut the perceived quality of your product. Competition-based pricing systems are therefore not an ideal strategy if you are positioning your business for long-term growth.
The sustainability challenge
Is Competition-Based Pricing Right for my Business?
Competitor-based pricing is a risky move for most retailers. The strategy does not account for internal costs, which can hurt long-term profits. Undercutting the market can provide a short-term boost in sales, but those sales often are not sustainable. This is especially the case for small businesses with higher costs and slimmer margins.
Despite this downside, this pricing strategy is useful for start-ups and large retailers. Start-ups sometimes struggle with value-based and cost-plus pricing. In early stages, their value is hard to determine, and their costs can be highly variable. Competitor-based pricing, then, can be a good way for new companies to fairly assess the value of their product or service. Stores with large inventories, on the other hand, can use competitive pricing to move inventory and increase traffic. A big box store might undercut the price of a product in surplus. The large retailer can afford the loss in the name of warehouse space, and it will usually recoup those losses in ancillary sales.
Competitive pricing is a useful business strategy under the right circumstances. It can also be used as part of a larger pricing strategy, and you can incorporate certain elements, such as price match guarantees, into your business plan.
For more information, please refer to the following pages:
- Top Factors to Consider When Pricing Products
- Guide for Value-Based Pricing
- What Is Cost-Plus Pricing?
- All About Dynamic Product Pricing
- Tips for Incorporating Different Pricing Methods
- How to Test Your Product Price
- How to Know You Should Change Your Product’s Price
- How to Price Your Product Perfectly