Competitive Pricing

What is competitive pricing?

Competitive pricing is the process of selecting the optimal price points for a product or service, taking into account competitors' pricing behavior.

Explanation

In general, companies have three options for setting the price of their product or service. They can set the price:

• below the competitor's price,
• on par with the competition, or
• above the competition

The precondition for adopting competitive pricing is the similarity of the products or services offered, whereby the primary use case is limited to products rather than services.

Therefore, the "competitive price" represents an equilibrium in which no company has the incentive to deviate from this price point.

What are the disadvantages of competitive pricing?

Monopolies hold more market power

Generally, the competitive pricing strategy is applied when many competitors are in the market.

In the case of a monopoly, the agent can use its market power to set a price above the competitive price.

It is a short-term strategy

Competitive-based pricing should be a short-term strategy. In the long run, this strategy can limit profits.

Your company must focus on its own product development to sufficiently differentiate its product from the competitor's product to set a higher price.

Too much focus on competitor's strategies

Competitive pricing can be a risky strategy. Companies should base pricing decisions on their data in addition to competitor's data and not just rely on competitors' pricing strategies.

Further reading

Competitive Pricing - Investopedia