Competitive Pricing: Definition, Advantages & Disadvantages

Can’t you just price your products based on costs and target profit margins? What’s the worst thing that could happen if you ignored competitor prices?

You’d have few people visiting your store and even fewer buying stuff. In other words, you’d lose sales. We understand that competitive pricing seems confusing, yet it meets the needs of online retailers.

If you’re ready, let’s break down what competitive pricing is, explain it with a real-life examples, and discuss the benefits and drawbacks in the FAQ section.

What’s competitive pricing?

It’s a strategy where businesses take competitor prices into account while setting their own prices.

They do it because online shoppers compare prices before deciding where to buy.

As you can see in the image below, consumers have a path between triggers and purchase. In this ‘messy middle’ , consumers compare online prices. In order not to lose sales, ecommerce store owners must have competitive prices.

This is an example of four stores that implement this strategy. That means they all keep track of each other’s prices to make sure their own offers are competitive.

As an online retailer, you have many competitors to keep track of. So you need a solid data collection system and a deeper pricing analysis.

What’s more, you must be able to respond immediately to competitors’ price changes.

Manually tracking 100 product prices from 10 competitor websites takes 12,5 hours, so we strongly advise price tracking automation.

Using a price tracking and dynamic pricing tool can give you many advantages. You can opt for:

• The cheapest positioning in the market
• The average positioning where most competitors are clustered
• The highest price positioning where luxury brands are clustered

So the dynamic pricing rules you set determine where you’re positioned against competitors.

When you target high-end customers and offer premium products, it’s better to price above competitors. It’ll result in fat margins but also, low conversions.

But if you want to target a large audience, you must offer competitive prices.

Of course, we are talking about two extremes, so there are thousands of different price points in between these positions.

Pursuing competitive pricing doesn’t mean fixing prices to a competitor’s. Rather it means taking competitor prices as a major factor when testing out different price points.

Real-life examples

Like the one we’ve done here, consumers can easily conduct a price search before buying anything, and nearly all do so. That’s why online stores track each others’ prices and try to remain competitive.

But not everyone wants to position as the cheapest.

Take a look at the Fitbit below.

Now, look at a similar company that also sells wearable tech.

In this case, Fitbit is able to charge considerably more because they are an established brand. Thanks to powerful branding, consumers are willing to pay much more than they would for a competitor brand.

Consumers are searching for tools to compare prices before purchasing. That’s clear in how we’ve seen purchase behavior change over the years on Google Search. Search terms ‘cheap’ and ‘best’ on Google are shown below.

The interest for ‘best’ has more search interest than ‘cheap’. This supports the idea that sometimes being the cheapest is not the best option. As online merchants, you need to be monitoring competitor prices, and take action according to it.

Takeaways

Like with most ecommerce strategies, there are advantages and disadvantages to it. But one thing is certain, you can’t survive in the ecommerce arena without a competitive pricing strategy.