Competitive pricing is a marketing strategy in which companies set prices based on their competitors’ prices. Also known as competition-based pricing, this strategy can be used in online and offline markets and is often used to attract more customers and increase market share.
However, for competitive pricing to be effective, companies must understand their competitors’ pricing strategies and how consumers perceive value. Businesses that sell similar products use competitive pricing more since services can vary from business to business, while a product’s attributes remain identical. Competitive pricing is generally used once the price of a product or service has reached an equilibrium level.
Competitive Pricing Strategies
Competition-based pricing models include markdown pricing, penetration pricing, price matching, premium pricing, and loss-leader pricing.
- Price skimming is when a company charges a high price for a new product to maximize profits. This strategy is often used when there is little or no competition for the product.
- Penetration pricing is when a company offers a low price for a new product to gain market share and may discourage competitors from entering the market.
- Price matching, or parity pricing, is when a company matches the prices of its competitors. This strategy can help ensure that customers do not switch to competing products.
- Premium pricing is when a company charges more than its competitor. Setting a higher price helps the company to differentiate itself from its competitors as a prestige or luxury brand.
- Loss leader pricing is when a company offers a low-priced product to expand its customer base. The goal is to offset the low price with a higher sales volume. This strategy can be effective in markets with competition and price-sensitive customers.
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