Competition-based pricing (competitive, competitor-based)
Competition-based pricing is a pricing method that involves setting prices for goods or services based on those of competitors. Instead of focusing on production costs (cost-plus pricing), customer demand (demand-based pricing), or a product’s perceived value (value-based pricing), the competition-based pricing strategy mainly relies on market information.
To develop a successful competitive pricing strategy, businesses must
- define their compset (companies that sell similar products or services and have matching profiles in terms of market share, location, target audience, etc.),
- research competitors’ pricing approaches and positioning strategies, and
- determine their own pricing depending on their goals and positioning (below, equal to, or above their competitors’ prices).
It’s important to understand that if matching prices are set, businesses must make an extra effort to attract customers, e.g., through aggressive marketing activities, providing better customer service, etc.
This approach is relatively easy to implement and works well for new businesses, but it doesn’t consider internal aspects (e.g., cost of production) or other market factors (e.g., customer demand), so there’s a risk of setting nonoptimal prices and losing revenue.