What is competitive pricing?
Competitive pricing involves setting prices in direct reference to competitor prices. Instead of starting from costs or customer value, you analyse the market and position your price relative to the players the customer might choose as an alternative.
Three price positioning strategies
↓
Below market
Volume strategy — lower price, higher market share
↔
At market
Parity pricing — compete on quality and service
↑
Above market
Premium positioning — higher price signals quality
The main pitfall — race to the bottom
Competitive pricing carries the risk of a race to the bottom — a spiral of price cuts where every player responds to competitors' reductions with their own cuts, until margins disappear across the entire industry.
How to avoid the race to the bottom
- Differentiate your offer — add elements competitors don't have
- Build loyalty through service quality, not price
- Create a premium product line with higher margins
- Combine with value-based pricing for value-conscious customers
- Monitor margins — never go below BEP under competitive pressure
✓ Pros
- Simple to implement
- Reduces risk of pricing disconnect from market
- Easy to justify to salespeople
- Good for new market entrants
✗ Cons
- Race to the bottom risk
- Ignores own costs and value
- Creates dependency on competitor moves
- Can lead to selling below break-even
Check your break-even point
Before cutting prices — make sure you're still above BEP.