How to create a competitive pricing strategy from scratch

June 12, 20200

One of the most essential parts of business decision-making is finding the right price point. Some merchants find it difficult to find the best prices for their goods or services. This can be a costly inconvenience that compromises the success of their business. If you first enter a new market, this is especially true. It is important to price your goods at the right levels and not allow competitors to take the advantage of them with lower prices.

The pricing strategies you set for your goods or services are crucial for the success of your company. Maintaining control over your business is crucial. You should utilize various systems and resources to secure your company’s financial health and ensure that it is being run smoothly & efficiently. It also has a ripple effect on other areas of the business, like cash flow, profit margins, sales pricing, customer retention, and market position. For your business to operate optimally, you need professional writers to provide quality content with that all important word-to-word match. This means choosing the best AI writer will ensure scalability and stay competitive. Pricing methods like these are a tried-and-true way for many businesses to operate as they help companies adjust pricing to keep costs in check.

What is a Competitive Pricing Strategy and How Does It Work?

Competitive pricing is how you set your prices based on your competition. Pricing should be as accurate as possible while taking into account business costs and profit margins. Since similar products are sold in the same market for an extended period, companies must use competitive pricing to remain on a level playing field.

Competitive pricing aka competitor-based pricing is a retail pricing strategy that considers competitive prices, promotions, and inventory data to set retailer’s prices. It makes a part of the dynamic pricing. According to retailers’ business goals, such prices can be equal, lower, or higher than the competitors’ ones.

This approach is very popular in markets with a high level of competition, e.g. electronics, toys, etc. where retailers sell similar products. In the case of proper usage, it allows a retailer to increase its profits and outcompete rivals. The reason? Most buyers nowadays browse many stores to find the optimal price, a task that is easy to accomplish as long as the prices of the online stores are publicly available.

Let’s assume a retailer decides to use competitive pricing as a part of its pricing strategy. Here is what such a competitive pricing strategy example might look like:

“During the second quarter, we’re testing a new approach to all XYZ brand TVs should be sold using competitive pricing to increase turnover and margin. The prices should consider competitive prices, markdowns, and promos.”

After category or pricing managers get such a task, they start to divide the TV inventory into segments to define which products are more profitable and help achieve margin goals, and which are cheap, yet popular so they might apply other tactics to increase their turnover.

Now they can set pricing rules for each segment. Here is what this competitive pricing example would look like on a segment level:

  • Popular and cheap TVs → In the case of rival shops decreasing their prices for this segment, we will set our prices 1% cheaper.
  • Margin-generating TVs → To achieve our margin goal we’re going to test price elasticity for this segment before setting a pricing strategy. We’ll set our prices 0.5-1-1.5-2-2.5%-… higher than competitors do until sales drop. Then we’ll stick to the most profitable percentage.
  • Other TVs → We are keeping prices equal to the market equilibrium level.

Best Competitive Pricing Strategies

Businesses may consider three pricing strategies when establishing the “best” price for their products or services:

Higher Prices: Your prices are higher than your competitors because they can offer to provide lower prices on the most competitive markets. This strategy is used by businesses that offer goods or services with more features than their competitors. Pricier products are typically used by high-profile, established brands. These businesses typically require a higher degree of quality than smaller merchants.

Lower Prices: Your prices are lower than your competitors’ prices in one or more of the markets in which you compete. Your business can save money by collecting data and selling it to other companies. Data analytics is an important aspect of modern business, so this strategy could be beneficial for you. Lower prices can be used as part of a loss-leader strategy. Loss leaders are retailers’ way of entering a market with an initial loss, before turning a profit. However, some are finding that it’s not effective anymore.

Equal Prices: Prices will be comparable to competing companies in your market and the price you need to charge to make a profit and stay competitive. Businesses that select equal price points to their competitors generally try to differentiate themselves by providing unique shopping experiences or offering attractive product alternatives

Why you need to monitor competitors

According to a Forrester Consulting study, 81% of shoppers compare the prices of several stores to find the best deal. This is due to the publicity of prices for online stores. The optimal price of the product significantly increases the likelihood of buying it in your store.

Determine the quality of data

As part of a study of retailers from six countries, we identified such indicators of data quality:

  • Depth of matching. Accounting for color, product characteristics, and other parameters that are not on the main product card.
  • Percentage of errors. When products are compared automatically and then checked manually, the number of errors is reduced.
  • Percentage of prices found. If a competitor does not have a product or a problem on the site, prices are not displayed.
  • The freshness of data. Data should be collected two hours before the revaluation, otherwise, they will decrease their value.
  • Data delivery time. The optimal time for data delivery after collection to the store’s ERP system is 20-30 minutes.

What to analyze

Monitoring competitor data is the first step in introducing competitive pricing.

The second step is their analysis and decision making. Need to research:

  • Price index. The most important indicator for a competitive pricing strategy, which displays the price positioning of your store in comparison with competitors, and helps to understand which of them affects sales more than others. Thanks to the study of the price index, you will understand which products can be sold more expensively without loss, and which ones should be reduced in price.
  • Promotion activities of competitors. In the same study by Forrester Consulting, it is indicated that at least a third of buyers are trying to find promotions and discounts before purchasing a product. It is important to constantly monitor what shares competitors hold in order to optimize their promotional offers and prices.
  • Availability of goods. If you see competitors running out of goods, make a decision according to your pricing tactics.

Internal company data also affects competitive pricing. You know the cost of your product, the desired margin, and the planned sales. Use this data to better analyze your pricing performance.