Competitive Pricing: The Advantages & Disadvantages

You hear about a new shiny e-commerce strategy like “competitive pricing strategy” and your first thought is to implement it right away.

That e-commerce store generated $1,000,000 in sales when they used it.

And this e-commerce store tripled its traffic.

But before you jump in head’s first, it’s a good job to evaluate each strategy to see whether it’s right or not for your business.

That’s exactly what we’re going to do in this post.

You’ll learn:

• An intro about what a competitive pricing strategy is
• How it’s applied within popular e-commerce stores
• The advantages of using such a strategy
• The disadvantages of using such a strategy
• How to get started for your business

Let’s go!

What’s a competitive pricing strategy?

A competitive pricing strategy, a.k.a. market-oriented pricing strategy, is an approach in which e-commerce retailers set their online prices based on competition rather than consumer-oriented pricing.

To be successful and experience the benefits of this strategy, retailers should have a solid data collection system in order to get fresh data from the competition and act with immediate and effective responses towards the competitors.

In a nutshell, a competitive pricing strategy requires a detailed market analysis.

An e-commerce retailer can set their own prices depending on their positioning in the market and aim to be the most competitive in the market, target the average or always be higher than the competition.

For example, if the business addresses high-end customers and offers premium products, it’s better to price the products higher than the competitors. This decision will lead to fat margins, high loyalty but also low conversions.

On the contrary, if the online retailer aims to boost its sales, it may price their products at lower prices and be the most competitive in the market.

To make competitive pricing analysis efficient for today, retailers need to automate it because matching all the products with competitors and tracking them manually means a lot of time waste. So, to make it more productive and beneficial, using e-commerce technologies such as competitor price tracking software would be a very profitable decision.

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With the ability of these smart services, you can better focus on analysis, make strategic decisions and know your true position in the market instead of just spending your time by gathering data from the market.

Now, let’s expand our knowledge by analyzing the advantages and disadvantages of a competitive pricing strategy.

More with an Example

Let’s look at two different e-commerce stores.

We’ll use Fitbit as an example.

Now if we look at a similar company who also sells wearable tech.

If Delvfire wanted to compete with Fitbit, what could they do?

Well in many cases they could raise their prices. This way they would be commanding a similar portion of the market to Fitbit, but would people be happy to pay it?

In this situation, Fitbit is able to charge more for their product because they’ve worked hard on their positioning in the market. Due to their branding and promotion, customers know Fitbit to be one of the leading companies for wearable tech.

The same goes for companies like Apple. Where you can buy a laptop for $2999 that does pretty much the same as a laptop for a lot less.

However, in other industries, the price is usually the only factor a customer will consider when buying a product.

Think about an item like bleach. If you’re buying bleach to clean your bathroom, how much are you really willing to pay?

In these cases, competitive pricing works well because you don’t want to price yourself out of the market where people don’t buy from you because they can get the exact same product for cheaper, elsewhere.

Advantages

Respond quicker to competition

One of the greatest advantages of using a competitive pricing strategy is you give your business control over the competition.

If you’re using a price tracking software, you’ll have access to intelligence that other companies would find difficult to gather manually.

You can use this intelligence to respond to your competitors’ every move. As a result, you can better position your business towards different strategic decisions of competitors and won’t lose your customers because of the price wars.

Delight customers who are price sensitive

Price is usually one of the key deciding factors for businesses or consumers when making a decision.

We can clearly say that online shoppers give importance to pricing and how these compare among other sellers.

Comparison shopping engines help shoppers find the best prices without making any effort.

As everyone’s getting really good at hunting deals, they won’t hesitate even one second to prefer one of your competitors if your prices don’t satisfy them.

So from the perspective of shoppers, using a competitive pricing strategy will help you to keep your customers happy and allow room for your business to grow.

Lay the foundations of dynamic pricing

With this strategy, you’ll take the first steps of dynamic pricing, a complex approach that stands at the top of competitive pricing strategies.

In dynamic pricing, frequently updated competitor pricing information can be used as a triggering factor to update your own prices depending on certain pricing rules you will be determining.

With the abilities of dynamic pricing, you’ll be able to compete much better in the industry. It will allow you to maximize profits with each pricing change.

Combine with other strategies

This strategy can be linked with some other pricing strategies to make it even more efficient.

For example, to hold the profitability through competitive pricing strategy, online retailers should always keep their costs in mind, and use a mixed approach, where cost-plus pricing may decide on the target profit margins according to the competitor pricing.

Avoid revenue loss from a race-to-the-bottom

Some businesses confuse this strategy where they cut their prices to the cheapest but in fact, there are opportunities that are missed if you don’t monitor your competitors right.

For example, your prices may be too low when compared to other retailers in the market, so lifting up the price by 5% isn’t really likely to affect your competitive position.

This is an opportunity to ramp up a price increase, improving your profit margins and still being the most competitive in the market. The best way to realize that opportunity is by using an automated competitor price tracking software.

By gathering price intelligence data from the market, you’ll have a clearer view of your price positioning and detecting pricing differences won’t be a hassle anymore.

Disadvantages

May get you distracted from other business tasks

If a retailer just focuses on competing with the other players in the market, they may miss the importance of other marketing tasks. Neglecting marketing tasks can negatively affect your brand image in turn.

It doesn’t work in all markets

The situation above is valid if you are selling premium products. For example, in the luxury market, online shoppers seek exclusivity and don’t care about the prices.

So, trying to be competitive in such industries may harm customer loyalty and brand value. It’s better to mix consumer-oriented and market-oriented pricing strategies in these scenarios.

By setting a competitive pricing intelligence tool, retailers assume that competitors have priced their products correctly. However, each business has different needs and objectives.

Implementing the pricing strategy of competitors may not fit with the company’s overall strategy and might cause disharmony.

Could be difficult for smaller retailers

For micro and small-sized companies, creating resources for such technologies, money, and new staff required to sustain a competitive pricing strategy can be a trouble. These company types may need to focus on growth or operational optimizations rather than trying to compete first.

How to succeed with competitive pricing

If you want to get started with implementing a competitive pricing strategy on your e-commerce site, the first step is to use pricing intelligence software because data will help you make smarter decisions.

Not only will you have access to your competitors’ current and historical pricing data, but you’ll be able to make educated decisions backed by data as to what their next move will be.

For example, notice your competitor’s products are running low on stock, or worse, sold out? This gives you a great opportunity to increase your product’s prices to keep up with the demand.

Takeaways

Like with most e-commerce strategies, there are advantages and disadvantages. Competitive pricing is no different.

You should now have a clearer idea of both the advantages and the disadvantages of implementing competitive pricing to your e-commerce store.

Take careful consideration of your business model and your current pricing whether this could be a viable option for your business!