When two products have similar core features, but are produced by different companies, competition results. Competition-based pricing strategy involves setting your prices based on your competitors’ prices rather than on your own cost and profit objectives. Before pricing your product, research your competition to figure out where you fit in or what to change.
Price Environment
Your price environment determines the level of control you have over competitive pricing. Price environments are market-controlled, company-controlled or government controlled. A market-controlled environment shows a higher level of competition, similar products and little price control by individual companies. A company-controlled environment shows moderate competition, unique goods and services, and a lot of price control by individual firms. In a government-controlled environment, the government takes input from related companies and then determines prices; public bus fare or state university tuition are examples.
Competitive Product
Competitive pricing relies on three product styles: lasting distinctiveness, low cross elasticity and perishable distinctiveness. Products with lasting distinctiveness are ones that will always stand out from the crowd, such as medicines protected by patent laws. Low cross elasticity means the demand for the product will rise, such as with a software upgrade. Products with perishable distinctiveness are unique in the beginning, but fall to medium distinctiveness after a period of time and would include popular technology products.
Price Range
Every product has a price range; look at your competitors pricing to find the range for your product. To decide where you fit on the current price range, or if you should choose something outside it, compare your product to those of your competitors. Customers use the existing prices as a guide to what is normal or considered a good deal, so be prepared to handle the consequences of pricing outside the standard range.
Product Comparison
The products with the most features can charge the highest price, so research what your competitors are selling first. Core features of all the products should be similar, if not the same, so you need something special to raise the price of your product. If, instead, you would rather be the cheapest, let that be your special feature and leave everything else out.
Target Market
Figure out what market your competitors are targeting, and pick a different one. Even though the products are similar, you can charge more if you design for a specific group. Certain markets will always pay higher prices, or are willing to pay for the perceived exclusivity, so take advantage of that in your marketing strategy.
General Strategies
Your price relationship to your competitor falls into one of four categories says Laurus Nobilis at Biz Development. These are pure parity, dynamic parity, premium pricing strategy or discount pricing strategy. In pure parity, your price always equals that of your competitor: they set the price and you match it. Dynamic parity happens when you pick a competitor and keep the gap between their price and yours the same. Premium pricing is higher than the competitors, but you gain a position of higher perceived benefits. In discount pricing, you always keep the price cheaper than that of competitors. Discount pricing is most commonly used by generic or store brands.
by Dana Griffin