Product and service innovation, an indisputable value proposition and top-notch customer service are all ways businesses can set themselves apart from their competition. But sooner or later, many companies will be forced to duke it out with their rivals based on price. These battles can be especially fierce in markets with similar offerings and price-sensitive customers. This is where competitor-based pricing can come in handy. With this strategy, a company uses its competitors’ prices as a benchmark for setting its own, keeping in mind its objectives, such as market entry or premium positioning. This article explains everything a company needs to know about competitor-based pricing, including when to use it, how to implement it, a trio of challenges and seven best practices.
What Is Competitor-Based Pricing?
Competitor-based pricing is one type of pricing strategy whereby a company sets its prices based on what its competitors are charging, typically by matching or beating their prices. In a fast-moving omnichannel landscape that makes it easier than ever for customers to research intended purchases, pricing can make or break the success of a product or service, impact a company’s bottom line and influence brand perception. Known synonymously as competition-based pricing, competitive pricing and benchmark pricing, this strategy is founded entirely on external market forces, unlike other pricing methods that center on internal business factors or customer perception.
Companies often choose competitor-based pricing to go to market quickly by using a relatively safe and normalized price point. This strategy is prevalent for highly commoditized products that are perceived by consumers as interchangeable. For example, a ream of standard weight paper is nearly identical no matter the brand and will likely be priced similarly. Likewise, a pair of nearby gas stations will often price their gas within just a couple of cents per gallon of each other.
Key Takeaways
- Competitor-based pricing is a method of setting prices based on how much competitors charge.
- The strategy can be used to set prices that are the same as, lower than or sometimes even higher than competitors’.
- Competitor-based pricing is most commonly used in competitive landscapes where products are very similar and/or customers are highly sensitive to prices.
- Companies use the strategy to win or defend market share, but it can potentially erode margin and devalue the brand if it is overused.
Competitor-Based Pricing Explained
Adopted for its simplicity of execution and alignment with customer expectations, competitor-based pricing uses the prevailing rates of competing products and services as the benchmark upon which a business establishes its own prices. Where a company sets its pricing relative to its competitors will depend on its product quality, market positioning and business strategy. It has three choices:
- Lower than the competition to attract customers and boost sales and market share.
- Equal to the competition to enter a new market quickly or simply keep pace with competitors.
- Higher than the competition to differentiate its products or brands as a premium offering.
For the most part, businesses will set prices that are to the same as or slightly below competitors’ prices. In a very competitive landscape that features a range of prices and more differentiating factors across offerings, an organization may engage in a more sophisticated method of competitor-based pricing where it charts out competitors by price and then slots its pricing between those that it feels it is most closely positioned against in terms of quality, customer perception and brand value. Consider a company that makes high-quality sneakers in a market that has 10 comparable offerings. Market analysis shows its sneakers are not the highest quality among its competitors, but the brand has a lot of value. As a result, the shoemaker decides to set its price point between the top two most expensive competitive shoes.
Competitor-based pricing is relatively easy to implement, compared to other pricing strategies. It also transfers the burden of pricing onto the backs of competitors. However, companies that blindly follow their competitors’ prices without understanding the determining factors behind those price tags, or their own costs of bringing an offering to the market, could limit or eliminate profits. Additionally, a company may struggle to differentiate itself over the long haul if it constantly competes solely on price without effectively communicating how its brand stands out from the rest of the market. This is why organizations often pair competitor-based pricing with other pricing strategies in their pricing process, evaluate business performance on an ongoing basis and conduct periodic market research.
Competitor-Based Pricing vs. Other Pricing Strategies
The right pricing strategy is crucial for a business to not just recover its costs but also optimize its profits. Competitor-based pricing focuses solely on what external competitors charge, whereas other pricing strategies are typically based on internal business factors, such as the costs of goods sold (COGS), or market forces, such as seasonal demand cycles. Three of the most common alternatives to competitor-based pricing are cost-plus pricing, value-based pricing and demand-based pricing.
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Cost-Plus Pricing
Cost-plus pricing is based on how much it costs a company to bring a product or service to market, plus an added markup. That markup can be a fixed dollar amount, a percentage of costs or both. Organizations that use cost-plus pricing should possess a deep understanding of their many direct and indirect costs, such as COGS, service development, labor, marketing, packaging, shipping and post-sales support. Without an accurate cost basis, a company engaging in cost-plus pricing could potentially set its profit margin too low or wind up operating at a loss.
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Value-Based Pricing
Value-based pricing is determined by customers’ perceived value of a product or service and what they’d be willing to pay for it. This is a more difficult pricing strategy to execute, due to the extensive market analysis, customer sentiment tracking and close attention to business metrics necessary to get it right. Companies that use value-based pricing rely on methods, such as customer surveys, price-sensitivity tests and market analyses, to determine how much buyers are willing to pay.
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Demand-Based Pricing
Businesses use demand-based pricing to optimize their profits in the face of variable customer demand, such as seasonal fluctuations and geographic differences. Demand-based pricing is also often used to help with yield management, which aims to maximize revenue from a fixed supply of inventory. A classic use of demand-based pricing is when a hotel or theme park raises its rates during peak seasons and lowers them during slower times of the year. Like value-based pricing, demand-based pricing requires significant analytical backing to get right, including analysis of historical business trends and industry data on seasonal, geographical and other trends that impact customer demand.
Comparison of Pricing Strategies
Pricing Type | What Prices Are Based On | How Prices Fluctuate |
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Competitor-based | What competitors are charging customers | Lowering prices below competitors' can attract customers; raising prices above competitors' can signify premium goods and services. |
Cost-plus | Production costs | After calculating the cost to produce or provide a good or service, businesses add a markup to generate profit and cover indirect business expenses. |
Value-based | What customers are willing to pay | Customers are willing to pay more for unique features, premium goods and services or brand prestige; lower quality or easily replaceable goods typically carry lower prices. |
Demand-based | Shifts in demand | Higher prices bring higher revenue when demand spikes; lower prices drive sales when demand drops. |
When to Use Competitor-Based Pricing
Piggybacking off of pricing research and the momentum of competitors can help businesses quickly come to pricing decisions that are likely to be in line with or exceed customer expectations. Indeed, competitor-based pricing can be advantageous in the following business scenarios.
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Highly Competitive Markets
Businesses in highly competitive markets, such as retail and telecommunications, use competitor benchmarks to align their pricing with what customers already expect. This may mean price-matching in tandem with highlighting product value in areas such as quality or customer experience to differentiate oneself from competitors. It could also mean slightly undercutting competitors, especially if the business can find ways to cut other costs in order to maintain a healthy profit margin. A third alternative: Some companies may decide to set prices above their competitors’, seeking to set themselves apart with a more premium offering.
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Price-Sensitive Customers
Competitor-based pricing may prove essential for gaining or maintaining market share in a product category or marketplace that’s dominated by price-sensitive customers. If selling a product with significant price elasticity — where a change in price will significantly impact demand, such as for consumer electronics — a business will need to keep up with competitors’ prices to ensure that they don’t lose customers. Or it could potentially improve its sales volumes by slightly undercutting competitor pricing.
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New Market Entry
Whether it is a startup or an established brand, a business with a new product or service can speed its time to market and customer acquisition work with competitor-based pricing. Doing so saves time that would have been spent on the research necessary for value-based or demand-based pricing. Additionally, it helps newcomers overcome their lack of historical data for determining pricing. Companies seeking to build up a new customer base also use competitor pricing as a benchmark in order to penetrate a market, charging less at the outset to attract interest.
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Lack of Differentiation
In highly commoditized markets or those that otherwise lack differentiation, competitor-based pricing often stands as an essential strategic path to sales. Some companies will use pricing as their differentiator, though this can be a double-edged sword that leaves them vulnerable to price wars and a race to the bottom. Meanwhile, other companies may price-match and seek out other methods of differentiation, frequently through a combination of better branding, marketing and customer service.
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Fast-Moving Consumer Goods (FMCG)
Whether it’s for eye shadow and lipstick or soda and chips, competitor-based pricing is a go-to pricing strategy for fast-moving consumer goods (FMCG) products, which often must jockey for position in a crowded field vying for the dollars of highly price-sensitive customers. Competitor-based pricing helps FMCG companies stay in line with consumer expectations, ensuring a “Goldilocks” price that’s neither too high nor too low in order to maintain a healthy market share.
How to Implement Competitor-Based Pricing
While competitor-based pricing is relatively simple to execute, compared to other more sophisticated pricing methods, businesses should still take measured steps to maximize sales and profitability when using this strategy. Here’s how to approach the process.
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Identify key competitors.
The first step of competitor-based pricing is identifying a main set of competitors most closely aligned to your product or service. Some of the variables to consider is how comparable their offerings are to your offering in terms of features, quality and targeted customers, as well as brand equity and the level of customer service provided by the company.
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Collect pricing data.
Next up is analyzing the prices of competitive offerings. This can be done manually by visiting websites and physical stores, but the information is most easily collected through price-tracking or price-scraping tools. These tools are especially important for fast-moving markets in which competitors are constantly changing their prices.
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Analyze your own cost structure.
Competitor-based pricing could potentially drag your company into unprofitability if you don’t closely cross-check external prices with your own fixed costs. Smart businesses will conduct an analysis of their COGS and indirect costs to be sure they can make up for what they spend and not fall below a pricing floor that could lead to untenable losses. In some instances, a company may decide to use a product as a so-called “loss leader” — to initially penetrate a market or knock out a competitor, for instance — and then raise prices, but that decision should be made with full awareness about any potential losses.
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Decide how to price your products or services relative to your competitors.
Competitor-based pricing has three potential paths to follow: lower than, the same as or higher than competitors’ prices. A lower price can help you crack into a new market and attract customers. The same price conveys product parity and matches what customers expect. A higher price can appeal to customers who equate it with higher quality or value.
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Align your pricing strategy with marketing and sales.
Whichever route you decide to take, it must be backed by support from marketing and sales. For example, a price-undercutting strategy may be profitable only if the sales and marketing teams are able to use certain products as loss leaders to persuade customers to make additional purchases that increase revenue. Matching prices requires marketing that communicates a product’s differentiating features compared with competitive offerings. Pricing higher than the competition requires an especially masterful touch by marketing and sales in communicating the quality and value advantages of your premium offering.
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Evaluate performance.
Competitor-based pricing is not a set-and-forget affair. Rather, it requires continual monitoring to assess product or service profitability and competitive and market alignment. To this end, key performance indicators (KPIs) to track include gross profit margin, sales volume, average order value, customer acquisition and market share.
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Adjust as needed.
An ongoing evaluation of business KPIs and regular updates on competitive analyses may reveal it’s time to adjust prices to account for certain factors, including shifts in market dynamics, changes in competitors’ prices and new cost considerations. Ideally, an organization will have the necessary real-time data and analytics available to adjust prices with confidence in the face of changing conditions. The flexibility afforded by data-backed pricing decision-making can significantly reduce the risks of competitor-based pricing (described in the next section).
Competitor-Based Pricing Challenges
Competitor-based pricing may be relatively easy to institute, but it’s not without its risks. For example, a company could leave money on the table if it’s matching its prices to a competitor that has an inferior product or a questionable brand reputation. The business could potentially sustain long-term losses or even reputational damage if it engages in a race to the bottom by chasing the lowest price in the market. Or it could simply get lost in the crowd.
The following are three of the biggest challenges posed by competitor-based pricing.
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Potential for Price Wars
Whether setting prices at or below a competitor’s levels, a company engaged in competitor-based pricing risks getting tangled up in a price war. A cascading reduction of prices could be unintentionally triggered in an intensely competitive market if many participants use this pricing strategy. Conversely, sometimes larger or more established players recognize that smaller upstarts are benchmarking against their prices, so they engage in a strategic price war to squeeze a rival they believe might not have the wherewithal to weather a long period of losses. However it plays out, a price war can drastically erode profit margin, hurt the brand and prime previously loyal customers for price sensitivity.
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Lack of Differentiation
Competitor-based pricing can be a mixed blessing for companies that operate in highly competitive markets, where customers view various offerings as interchangeable. Companies might decide to match or beat their competitors’ prices to stay in line with customers’ expectations. But, at the same time, if prices and products are too similar, then it can be difficult to stand out from the crowd. Without a solid marketing or sales plan, this lack of differentiation could make it difficult to build or maintain market share.
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Ignoring the Company’s Own Costs and Value Proposition
Organizations with a unique value proposition or tons of brand equity could lose out on profit by matching competitor benchmarks, rather than going higher. In the meantime, businesses that try to beat competitors’ prices without keeping their own cost structure in mind may find themselves in financial peril. In either case, ignoring internal business factors, while setting prices relative to the competition, can pose significant challenges to the health of the business.
Best Practices for Effective Competitor-Based Pricing
With the right set of best practices, a business can reap maximum rewards from competitor-based pricing, while avoiding its biggest pitfalls. This endeavor requires solid research, excellent branding and customer outreach — and some stopgap measures to ensure that the business doesn’t blindly follow the competition into making unsound pricing decisions.
- Perform market research: Organizations will be most successful with competitor-based pricing if they not only research their competition’s prices, but also conduct thorough market research to identify their rivals’ strengths and weaknesses. Doing so can help the firm spot opportunities to differentiate a price-matched product or to bundle new products in concert with a loss leader. Research can also fuel ideas for tweaking product positioning or going after new customer segments.
- Segment competitors: Segmentation of competitors is a useful way to conduct competitive analysis. This works similarly to how a business would segment its customers to better understand buyer personas and target markets. Some of the dimensions by which a business can organize or segment competitors include by common features and bundling options, brand valuation, geographical coverage, customer satisfaction scoring, routes to market and, of course, pricing. Segmentation can help an organization better understand which competitors it’s best positioned to compete against on price and recognize where to make changes to maximize profit or shift position in the market.
- Use technology and tools: Robust data analytics and a strong suite of pricing management tools can help businesses align their competitor-based pricing strategy with real-time changes in the market and business realities surrounding inventory management, supply chain dynamics and costs. An automated platform makes it easier to quickly and dynamically adjust prices to maximize profit despite changing conditions.
- Understand customer perceptions: Keeping close tabs on customer perceptions regarding prices and the perceived value of an offering can help ensure that the company remains in sync with customer expectations (no matter what pricing strategies it uses). Because competitor-based pricing has the potential to negatively impact brand reputation and stimulate price sensitivity in consumers, customer perception is worth tracking. Additionally, customer feedback and focus group studies could potentially identify products or markets for which it might make sense to adjust prices to boost profitability.
- Create a differentiation strategy: If a company is consistently matching the price of its competitors, it’ll need a strong differentiation strategy to help it stand out. Some of the ways companies create noteworthy value propositions include offering white-glove customer service, building omnichannel customer experiences, establishing and promoting stringent quality standards and creating more features within the product or service. Investing in strong sales and marketing campaigns to communicate those differentiators is crucial to the strategy.
- Balance with other pricing strategies: Sophisticated organizations rarely use competitive-based pricing strategies in a vacuum. When backed with robust pricing management software and a strong set of historical data and real-time analytics, businesses can establish dynamic pricing methods to optimize prices through a hybrid approach that dips into the best of other pricing strategies, such as value-based pricing or demand-based pricing.
- Avoid price wars: Maintaining a position of strength through competitor-based pricing means steering clear of constantly lowering prices in response to pricing tactics by competitors, which then retaliate by lowering theirs again. Some ways to avoid price wars is through nonpricing actions, such as adding new amenities or features that justify current prices, or offering selective pricing actions, such as product bundling or volume pricing options. Companies must also recognize that there could be other behind-the-scenes business reasons for price drops. For example, a company that wants to liquidate inventory before a new product rollout might decide to substantially lower its prices.
Competitor-Based Pricing Examples
Competitor-based pricing is a common pricing approach across many B2B and B2C businesses and business models. Some classic examples of businesses today that are engaging in public competitor-based pricing strategies include:
- Rideshare services Uber and Lyft competing closely on pricing.
- Retail heavyweights Walmart and Amazon competing against each other and additional online counterparts with constant pricing adjustments based on what the other is charging.
- Apple choosing the premium route by charging above its competitors’ prices to cash in on its branding and application platform ecosystem.
These are just a few high-visibility examples of competitor-based pricing on the market. It’s also used by countless other businesses, from small mom-and-pop shops all the way up through enterprise organizations. Some hypothetical scenarios of what this looks like in the real world includes:
- A startup in the software-as-a-service prosumer productivity space wants to bring a new product to market but doesn’t have the historical data to support a value-based pricing strategy. It chooses three key competitors with similar feature sets and finds that their prices vary, coming in at $5 per month, $9 per month and $12 per month. The startup’s market research shows that it is competitive on features and reliability against all three players, but that it may lack the level of customer support of the highest priced competitor. It decides to charge $8 per month to remain very price competitive without signaling itself as a discount option.
- A clothing retailer that’s been struggling to build market share and attract customers into its stores decides to price its jeans and graphic T-shirts competitively, while maintaining cost-plus pricing for everything else. Its biggest competitors average $40 per pair of jeans and $15 per tee. In response, the retailer prices its jeans at $30 per pair and $9.99 for tees, with the expectation that the margin it loses on these loss-leader items will be made up by the added volume of sales on other products throughout its stores.
- An established consumer packaged goods manufacturer introduces a variety of high-quality, keto-friendly bread into the market with hopes of rapidly building a customer base. Its targeted competitors are pricing their goods from $5.98 to $7.49 per loaf. The manufacturer pegs its price 10% lower than the highest price offering and invests significantly in marketing to convince customers of the taste and nutritional value offered by its new line of bread.
Manage Your Pricing Data and Financials in One Place: NetSuite
Real-time visibility into a business’s financial performance can supplement a competitor-based pricing strategy with a data-backed reality check to ensure that it can maintain healthy margins while keeping up with its rivals. NetSuite Financial Management provides a cohesive platform from which a business can manage pricing data and other financials in one place. This gives finance and pricing professionals a single source of truth for setting pricing in relation to other revenue management factors. As a result, organizations can make use of competitor-based pricing with confidence, knowing they can quickly adjust to changing business conditions no matter what the competition does.
Competitor-based pricing can offer companies a successful path for winning or defending their shares in very crowded markets that serve price-sensitive customers. The strategy also offers market entrants a simple method for establishing tried-and-true pricing that’s in line with customer expectations. However, smart companies also understand that they have to temper the use of competitive benchmarks with other pricing considerations, like cost structures and perceived product value, lest they fall prey to the pitfalls of competitor-based pricing. A well-balanced use of this strategy requires a strong grasp of the company’s financial position and costs, historical pricing and sales patterns, market dynamics and customer demand.
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Competitor-Based Pricing FAQs
What is competitor pricing strategy?
Also known as competitor-based pricing, a competitor pricing strategy is a method of setting prices for goods and services based on what the competition is charging.
What is competitor-based pricing with example?
Competitor-based pricing is a strategy that uses competitors’ prices as a benchmark upon which a business sets its own pricing — either the same as, lower than or higher than the competition’s. One example of this is when one major soda brand matches the price of its closest competitor.
What is competitive market based pricing?
Competitive market based pricing is a pricing method that uses the rates set by competitors to make pricing decisions for a company’s own products and services.
What is competitor oriented pricing methods?
Competitor-oriented pricing methods use competitor pricing as benchmarks on which to set prices for similar products and services, typically using the competition’s pricing as a level to match or beat.