How to build a competition-based pricing strategyĪ strong competition-based pricing strategy is built on research. If you’re not changing your prices and differentiating your product over time, you’re like a shark who’s stopped swimming: dead in the water. Pricing is a process that requires data and attention. Lowering prices (in most industries) leads to doubts about product or service quality and lower revenue from tiny profit margins, even though customers would be willing to pay more.Īs we alluded to before, competitor-based pricing also gives you too much of a “set it and forget it” mentality. Competitive pricing exacerbates that idea by simplifying price as a barrier that constantly must be lowered. Maintaining a lower price than your competitors isn’t always the best way to attract consumers. Why would you let fellows in the other end zone determine the baseline for your price? Every customer a competitor serves is an opportunity lost for you. Remember, it’s your business, your product, and your revenue. You could keep the same price forever because competitor A hasn’t changed her price, or raise and lower prices in response to trigger-happy competition. If a large portion of companies prices their product based purely on price comparisons, then with time the entire industry loses touch with demand. The goal of your business should be to maximize revenue and profits, even if it does take a little bit of extra work on the pricing front.Ĭompetitive pricing assumes that businesses already in the market have the correct answer after a lengthy decision-making process. Simply copying your market’s prices could lead to lost profits if you sell your product short. Pricing is often neglected, which is a shame because it’s your customer's main consideration (sometimes an incentive, but more often a barrier) before purchasing your product. The most common ways businesses raise their profits is to increase sales, decrease production costs, or lower overheads. Unfortunately, software doesn’t tend to have this same luxury. After all, for most consumer products, there are millions of customers and enough data to move pricing closer towards a methodology based on market price and market share. In saturated industries like retail, competitive pricing can be fairly accurate. It’s kept your competitors afloat, so similarly, it should do the same for you. If you have a fairly solid grasp on your product’s quality, target audience and cost of production, this method will most likely never lead to bankruptcy. It’s rare to royally screw up using this form of pricing, even in a competitive market. Remember, this gets much more complicated when there are no congruent goods to price match, which is often what happens in the software space. It is also possible to make adjustments in prices by following tweaks made by competitors. In most industries, marketing and product managers will have to do relatively little research to find a competitive price. If you’re in an industry with even one or two direct competitors, you can implement a reasonable competitor-based pricing strategy. To understand this method, let's examine what it entails and uncover the competitive pricing advantages and disadvantages before exploring who should and shouldn't utilize this tactic. Data eliminates that space as much as possible, with information about your competitor's positions in the market, to get as focused on the target as possible. Think of pricing as a game of darts where you’re trying to hit a bullseye (the perfect price), but there’s all that extra space on the board. Remember, pricing is a process that eliminates as much doubt as possible for a key stakeholder to make a profit-maximizing decision. We elaborated on this assertion in our pricing strategy post, but the key is that a 1% improvement in price optimization results in an average boost of 11.1% in profits - a huge impact!Ĭompetitor-based pricing can help you get there if done correctly. No other lever has a higher impact on improving profits. Pricing is the most important aspect of your business. Our first post was about cost-plus pricing. competition-based pricing or price intelligence). This post concerns competitive pricing (a.k.a. Welcome to the second post in our series on key pricing methodologies, highlighting their pros and cons.
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