Competitive pricing → setting the price of a product by considering the prices charged by competitors
→ The business may set its price → above, equal to or below competitors’ prices depending on its objectives and competitive position
Objectives of Competitive Pricing
→ Maintain or increase market share
→ setting a similar or lower price → makes the product competitive → may attract customers from rivals
→ Remain competitive
→ matching competitors’ prices → reduces the risk of customers switching to rival products
→ Increase sales volume
→ setting a price below competitors → may attract price-sensitive customers → increasing quantity demanded
→ Maintain profit margins
→ business considers competitors’ prices while ensuring the price covers costs and provides an acceptable profit
→ Support brand positioning
→ setting a higher price than competitors → may communicate superior quality or premium positioning
How Competitive Pricing Works
→ Price below competitors
→ lower price → attracts price-sensitive customers → increased demand → higher sales volume
→ Price equal to competitors
→ similar price → reduces price differences → customers may choose based on quality, promotion or brand image
→ Price above competitors
→ higher price → requires customers to perceive additional value → business must justify the premium
Example
→ A supermarket sells its own-brand breakfast cereal alongside several well-known brands
→ Competitors charge ₹300 per box
→ The supermarket may set its price at ₹250 → attracting price-conscious consumers
→ Alternatively → it may charge ₹300 → and compete through quality, packaging and brand positioning
Usefulness of Competitive Pricing
→ Useful in highly competitive markets
→ competitor prices provide a clear reference point → making it easier to establish an acceptable market price
→ Useful when products are similar
→ customers can easily compare prices → competitive pricing helps prevent losing customers
→ Useful for maintaining market share
→ matching or undercutting competitors → can reduce customer switching
→ Useful when demand is price elastic
→ a lower price → can lead to a relatively large increase in quantity demanded
Analysis
→ competitive pricing → keeps the business’s price close to rivals → reduces the likelihood of losing price-sensitive customers → helps protect market share
→ pricing below competitors → increases price competitiveness → may increase sales volume → greater production → possible economies of scale → lower average costs
→ pricing above competitors → can only succeed if customers perceive greater value → strong branding or differentiation → may allow higher profit margins
Evaluation
→ Advantage: simple and practical → competitors provide a useful benchmark for pricing decisions
→ Limitation: competitors may have different costs → matching their price could result in low or negative profit
→ Limitation: focusing too heavily on competitors → may cause the business to ignore its own costs and customer willingness to pay
→ Price wars may occur → one business reduces its price → competitors respond with further reductions → profit margins fall across the market
→ Competitive pricing is most useful → when products are similar and customers can easily compare prices
→ However → if the business has a strong USP or differentiated product → cost-plus, value-based or premium pricing may be more appropriate
→ Overall → competitive pricing can help a business remain competitive and protect market share → but the final price should also consider costs, demand, product differentiation and business objectives.