A 1% increase in price will result in an 11.3% increase in operating profits.
But when you’re entering a new market, how can you know what price to start with? And by increasing the prices, how could you be certain that you aren’t overpricing your products?
The answer: steal your competitor’s prices.
Stealing competitor prices is part of competitive pricing. It’s also one of the easiest ways to price your products when entering new markets. You can use this as your base price and then discount, match, or raise the prices for your products.
Competitive pricing involves gathering price data from across your competitors and extracting insights to use for your store. A well-implemented competitive pricing strategy can help disrupt markets, gain market share, and boost your sales.
But what exactly is competitive pricing, and how can you use it to your advantage?
What is a competitive pricing strategy?
A competitive pricing strategy is when businesses price their products in relation to their competitors. This strategy takes into account the prices for similar products and helps determine how to price your products to gain market share.
There are a few things considered in a competitive pricing strategy:
- Cost of the product or service
- The perceived value of the product or service
- Competitor’s prices
- Your target acquirable market (TAM)
Competitive pricing can be a useful tool for businesses when entering new markets or launching new products. It is also important to remember that the goal is to not just undercut the competition but to also offer a product or service that is perceived as being of high value.
Benefits of a competitive pricing strategy
To stay ahead of the curve, a pricing strategy needs to be both competitive and profitable. Competitive pricing offers three major benefits that can help get your business off the ground.
Understand competitors better
By gathering data on your competitor’s prices, products, and marketing strategies, you get a clear picture of their business and what they are doing to succeed.
For example, if you run a grocery store and there’s a competitor right around the corner, you can begin surveying their products and the prices. This will help you determine the products they sell and the add-on services they offer to capture more customers.
Choose a pricing strategy
Studying the competitive landscape can help determine the pricing strategy that is working and adjust your strategy accordingly.
If the competing grocery store decides to offer a massive discount on the products, the store will see a spike in sales and you will notice a comparative drop in sales as your customers flock to get cheap products.
At this point, it makes sense to offer similar discounts to ensure your existing customers have no reason to switch.
Improve products and services
While you study your competitors’ products and pricing strategies, you gather data that can later be used for identifying gaps in the market.
As you study multiple grocery stores, including those you do not directly compete with, you’ll find products that you don’t offer yet but are high in demand in other markets. Offering such products increases your store’s perceived value as you seem to better understand customer needs and gives you an immediate competitive advantage.
5 competitive pricing strategies to gain market share
Different businesses will use different competitive pricing strategies. Let’s look at the most common pricing strategies that you can choose from.
1. Loss leader pricing
Loss leader pricing is a strategy a business charges the lowest price in the market to attract customers, even if it means selling at a loss. This strategy can be effective in markets where there is a lot of competition and price is a major deciding factor for consumers.
If Target offers a 10% discount on all the products compared to Walmart, customers will buy from Target. To compete, Walmart could lower its product prices to match or beat Target. While this may lead to a loss in the short term, Walmart wins long-term by attracting customers that would otherwise have gone with Target.
2. Penetration pricing
Penetration pricing is a competitive pricing strategy where a new business in a market charges lower prices and offers more value to gain market share and increase sales. The price is then gradually increased as the business and its products become more established in the market.
Penetration pricing is seen very often with businesses offering introductory discounts. This lets the initial customers hop in at discounted prices.
And if the product is sticky enough, a majority of the customers will be retained even after the prices return to normal.
3. Price matching
Price matching is a process of copying the prices that a competing business sets for products or services that you also offer. This is one of the easiest ways to implement competitive pricing as it requires minimal research and analysis.
You can use competitive price matching tools to automate the entire process and get your products out in the market. However, price matching works better in the beginning since your time is better spent on marketing and community building. As your community grows, it makes more sense to raise your prices.
4. Price skimming
Price skimming is a pricing strategy where a business charges a high price for newly launched products to maximize revenue. The price is then gradually lowered as more competitors enter the market and as the product becomes more widely available. This strategy can be effective in markets where there is a lot of pent-up demand for a new product.
For example, when an iPhone is released, there is a lot of demand due to its marketing, and the price is set high to match. As more competitors begin offering similar products for lower prices, Apple is ready with their next iPhone while lowering the price for the older models.
5. Premium pricing
Premium pricing is a pricing strategy where a high price is charged for a product to convey a sense of quality or luxury. This strategy can be effective once you’ve set your brand apart as a premium, high-value brand, through marketing and community-building.
For example, BMW prices their cars higher than Chevrolet. The company has earned its reputation for being a high-value car manufacturer and customers expect to see the same reflected in the car prices. At this point, it makes more sense for BMW to charge a premium to maintain the brand image than to offer lower-priced cars to be competitive.
How to develop and implement a competitive pricing strategy
To be successful with competitive pricing, businesses need to ensure proper implementation of the same. A properly implemented pricing strategy takes into account the price gaps within the market that your products can fill in.
The popular phone brand OnePlus used penetration pricing to enter saturated phone markets across the globe. It started with a pocket-friendly price of $299 to blend in with the existing phones.
To stand out, it offered much higher hardware specifications at the same price. This gave customers a reason to try the brand even when they had similarly priced phones from brands they already trusted.
You can replicate the competitive pricing strategy that OnePlus used by following the steps below:
Determine brand goals
Developing a competitive pricing strategy starts with understanding what your brand goals are. What are you trying to achieve? Are you trying to be the low-cost leader, or are you aiming for a more premium price point?
OnePlus wanted to enter the phone market as a mid-segment phone and slowly begin competing for the market share that iPhones had captured. They did so by offering a robust and seamless experience like iPhone by optimizing the phone for Android.
Gather competitor data
Next, you need to gather competitor data. This includes competitor pricing, product offerings, branding, and content strategy. This will help you understand their business better and see how you can fill the market gaps with better features, service, or pricing.
OnePlus studied the best-selling phones in every market they wanted to enter. This allowed them to get a bird’s eye view of the average phone prices that they can enter. They also determined the specifications of each of the existing phones and beat that configuration by offering a premium-segment processor and graphics in a midrange phone.
Analyze the branding and marketing strategies
Analyzing the branding and marketing strategies will help you to understand how competitors are positioning themselves in the market and what kind of messaging is working well.
You can then use this information to adjust your own branding and messaging accordingly.
When OnePlus started, many of the best-selling midrange phones like Xiaomi and Realme used flash sales or pre-booking discounts to lure customers in. OnePlus used the same strategy to gain initial traction and create a sense of scarcity. The company continued to use these marketing tactics to get their initial customer base in the market before selling their higher-priced phones.
Understand the customer needs (Know your customer)
Studying the existing market helps you understand exactly what customers are looking for and how much they are willing to pay for it. This information is not only useful in setting your prices but also for creating a better product.
The existing features offered by flagship competitors gave OnePlus a clear picture of what was working in the market. The company then created phones with similar features and priced them in the midrange, thus disrupting what customers expected from midrange phones and making OnePlus phones, a no-brainer.
Adjust product prices based on the findings
As you capture market share, you need to adjust product prices to match your marketing and branding efforts. This may mean making some products more expensive and offering discounts on others. It’s a good idea to run price tests to see how they impact your sales before making any final decisions.
As OnePlus began gaining market share, it moved into more premium products. Because the trust was already built, customers looking for premium phones were happy to consider OnePlus.
This strategy can be applied to most products. Once you gain customer trust through high-quality products and fair pricing strategies, you can then begin moving higher on the sales ladder and ask for premium prices. This will also help you make up for the lost profits while offering lower prices.
Monitor and adjust with regular testing
After you have gone live with the new prices, you must monitor and adjust them for market fluctuations. This can be done through the use of price testing. If you run a Shopify store, running a price test can be easy with Dexter.
With its simple 3-step setup wizard, Dexter helps you select a product, increase or decrease the price, and show the new price automatically to a segment of the audience.
Dexter makes these modifications without visually changing the product page or the page URL.
You can continue running your ads and marketing campaigns to the existing URLs and gain accurate insights through statistically significant data that Dexter extracts. Once you have the required insights, switch the price test off and set the new prices.
Depending on the seasonality of your product, you may need to run regular price tests. Also, pairing competitive pricing with a seasonal pricing strategy would be beneficial in such a case as it will help you predict when you should drop or raise the prices and by how much.
How Ovako Steel put competitive pricing into practice to win market share
Ovako Steel AB (OS) is a European steel manufacturer incorporated in the 1900s. The company has experienced market enough cycles to incorporate data-backed pricing strategies to further its profitability goals.
The company wanted to enter the Finnish market and choose to implement multiple competitive pricing strategies to gain market share. They initially began with the penetration pricing technique.
In that, OS surveyed the steel markets in Finland for the product offerings, prices, and demand. They introduced their products at lower prices than the competitors to gain their first few customers.
Since OS had been successful in Sweden and had the capacity to go through reduced margins without hurting their business.
“When developing a pricing strategy it is important that the strategy reflects the company’s overall strategy, so a company with exclusive products doesn’t price them in the lower end of the price scale. This would send out mixed signals to the customers, making them reluctant to buy from the company and choose another manufacturer instead.” — Michael Morris, Ph.D., and Roger Calantone, Ph.D., Four Components Of Effective Pricing.
As the company started understanding the needs of its customers, it started introducing new products using the competitive price skimming strategy. With this strategy, OS made up for the lost margins during its entry into Finland.
OS had a competitive advantage as it introduced useful products in the otherwise stagnant industry, and was able to position itself as one of the top manufacturers. As they slowly established their position, OS began charging a premium from certain segments of their customers using the pricing matrix. This allowed OS to earn higher profits as they offered better quality products to customers.
Leverage competitive pricing to grow your business
Competitive pricing can be a winning strategy when you thoroughly understand your market and customers. While scraping competitor prices may work fine for many businesses, competitive pricing becomes more powerful when multiple competitive pricing strategies are combined.
With that said, competitive pricing is not a set-it-and-forget-it strategy.
It requires regular upkeep like almost anything in business. Regular price tests need to be an integral part of competitive pricing to ensure that you’re not driving customers away from your business by over or underpricing your products.
For Shopify stores, price testing can be set up in just 3 simple steps with Dexter. You can extract powerful insights to determine how your customers value your products. If you need help with setting up price tests, don’t hesitate to drop us a line at firstname.lastname@example.org and one of our pricing experts will be happy to help!