Competitive Pricing

Definition:

Competitive pricing is the process of selecting the optimal price points for a product or service, considering the pricing behavior of competitors.

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 the adoption of competitive pricing is the similarity of the products or services offered, whereby the main use case is limited to products rather than services. The “competitive price” represents an equilibrium where no company has an incentive to deviate from this price point.

What to watch out for

Watch out for monopolies

Generally, the competitive pricing strategy is applied when there are many competitors in the market. In case of a monopoly, the agent can use its market power to set a price above the competitive price.

Think about the future

Competitive based pricing should be a short term strategy. In the long run, profits can be limited with this pricing strategy. In order to set a higher price, work must be done on product development to differentiate the product sufficiently from the competitor’s product.

Rely on your data not your competitors

Competitive pricing can be a risky strategy. Companies should base pricing decisions on data and not just rely on competitors’ pricing strategies.

Further reading

Competitive Pricing - Investopedia