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What Is Competition Based Pricing and How Does It Work?

June 30, 2022

If you’re in business, you know that one of the key ways to stay ahead of the competition is to be aware of what is competition based pricing. After all, if they’re selling a similar product or service as you are, then it’s important to know what price point they’re offering so you can adjust yours accordingly. But what happens when your competitor changes its prices frequently? Or worse, cuts their prices so low that it feels impossible to match them and still make a profit? This is where competition-based pricing comes in.

What is competition based pricing? Competition-based pricing is simply setting your prices based on what your competitors are charging for similar products or services. This type of pricing strategy can help ensure that you remain competitive and don’t lose out on potential customers due to your products being priced too high.

Of course, there are some risks associated with this approach – namely, that you could end up cutting into your own profits if your competitor’s prices drop lower than yours – but overall it can be an effective way to keep tabs on the market and ensure that you’re always offering a fair price.

What Is Competition Based Pricing?

This type of pricing model involves setting your prices based on what your competitors are charging. This strategy can help companies stay competitive in their markets and attract customers who are looking for a good deal.

Some businesses have to use competitive pricing strategies because their customers often compare prices, and the cost of switching from one company to another is extremely low.

For most businesses in the SaaS space, basing your pricing strategy too heavily on the competition can be detrimental. There are often many other variables to consider when products are not congruent.

Look at how helpdesk software like ZenDesk, HelpScout, and Freshdesk are all vastly different and cater to specific types of customers.

As such, the pricing of HelpScout and ZenDesk shouldn’t be the same. However, they should both keep a close eye on each other, but only for strategic purposes.

Pricing based on competition only looks at what your competitors are charging, not the value that customers place on your product or service.

This is compared to strategies that determine price based on factors like demand or the cost of goods.

Your pricing is the most important factor in your business. No other aspect has as great an effect on your profits.

Understand that a 1% increase in your prices can result in an 11.1% rise in your revenue.

That’s an incredible increase!

Determining your pricing based on what competitors are charging can be an effective way of maximizing your profits. Just remember that a price that is too high can scare away customers, but too low may mean that your company isn’t making enough.

Pricing can be thought of as a game of darts, with the goal being to find the perfect price that hits the bullseye. However, there is often a lot of extra space around the bullseye that can distract from the goal. Data can help to eliminate this space and guide you to the target.

Cost-plus-pricing provides very little data when it comes to setting prices, and it’s actually a very weak strategy for even retailers.

Fortunately, competitor-based price setting is a little better.

Let’s first look at what a competitor-based pricing model is, before exploring the pros, cons, and who should and shouldn’t use this type of model.

Is Competitor-Based Pricing Ethical?

The act of copying a competitor’s prices is just like plagiarism.

Copying prices and essay-writing aren’t exactly equivalent, but the process of stealing someone else’s price is pretty similar to swiping an essay off the Internet.

Another way to look at this: think of your rival companies arranged on a metaphorical “totem” with the most expensive or upscale brand on top and the least expensive or most inexpensive one on the bottom.

You then decide which category you fit into, place yourself accordingly, and set your price.

Wait a minute, is that not a bit random?

Of course, it is, which is why we will take a look at the pros and cons of competitor-based pricing.

Pros of Competition-Based Pricing

1. Simple

If you’re in an industry that has competing companies, you can base your prices on your competitors. In most industries, product managers only have to do little research to find a good price.

It can be difficult to keep up with competitors when you’re not selling similar products. This is often the case in the software industry. Making price adjustments based on your competitor’s changes can help, but it may not be enough.

2. Low Risk

This pricing structure is relatively low risk. As long as you have a good understanding of the quality, target audience, and cost of your product, this price structure is unlikely to cause your business to go under. This has helped keep your competition afloat, so it should do the same for you.

3. Accurate

In an industry where there’s lots of competition, such as retail stores, you can base your prices on what your competitors are charging. After all, there are millions of customers so there’s enough information out there to make price adjustments.

Cons of Competition-Based Pricing

1. Missed Opportunities

The most popular ways to increase revenue are by boosting sales volume, reducing expenses, and cutting costs.

Often, pricing is overlooked, which is unfortunate, because it’s often the deciding factor in whether or not a prospect buys from you.

Copying your competitor’s pricing without understanding the specific value that you offer will lead to lost sales and profits.

The goal for your business should be to maximize your revenue, even if it means working a little bit harder on your pricing structure.

2. Following The Herd

The competitor-based pricing model assumes that all your competitors have perfect information and that all of their decisions are smart.

This can be a fair game if just one company decides its pricing after considering all the prices that exist at that time.

If most companies use this method, then over time, it could lead to the industry as a whole becoming out of touch with customer demand.

You could potentially keep the same pricing strategy indefinitely if your competition doesn’t adjust theirs. However, you might choose to raise your price or drop yours to undercut your competition. Every customer your rival has is a customer you miss out on.

It’s your company, your offerings, and your profits. Each prospect that goes to your competition is a missed opportunity for you.

Why on earth would you allow your competitor’s pricing to be the baseline for yours?

3. Not Thinking Long Term

While dropping your price is one way to drive more business, it isn’t the only way. The idea of competitor-based or pricing-driven marketing is that your only way to stand out is by lowering your price and hoping you attract enough clients.

When prices drop, it typically leads to doubts from consumers about the quality of the product or service. In addition, the decrease in profits from a small margin can cause the company to lose money.

Competitor-based pricing allows you to set a price and forget about it. However, as with most things, this should not be the case. Your prices should be the result of careful data analysis and adjustment.

If you’re not changing and improving your prices, you’re like a fish that’s out of water: you’re dying.

Conclusion

What is competition based pricing? Competition-based pricing can be a helpful way to keep tabs on the market and ensure that you’re always offering a fair price. However, there are some risks associated with this approach – namely, that you could end up cutting into your own profits if your competitor’s prices drop lower than yours. Overall, competition-based pricing is an effective way to stay ahead of the competition and remain competitive in the marketplace.

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