How to build a competition-based pricing strategy
A strong competition-based pricing strategy is built on research. When you understand how the top competitors in your market are pricing their products and how that pricing might impact customers’ expectations, you have a foundation for setting your new product’s or service’s rates.
Identify the competitors in your market
The first step to competitor-based pricing is determining who your competitors are. Which companies are selling similar products or services? This is fairly standard market research you should be performing already.
Then, group them by specific characteristics, such as tenure and market share. Pick out the companies that most closely match your own brand’s profile—these are your top competitors.
Research their pricing and positioning strategies
Once you know the competitors that make up your market, perform a competitive pricing analysis to dig into their pricing models and positioning strategies to build a map of current trends. Make sure to look at not only their pricing but also the way it’s packaged, the types of tiers they use, and the features they differentiate on. This research will help you understand what pricing and positioning customers expect in the market so that you can choose the best price for your product or service.
Average the price of all competitors
Creating a pricing map will help you understand what all of your different competitors are doing individually, but it’s also important to look at all of this pricing data in aggregate as well.
To get the latter view, calculate the average price of your product type across competitors. Knowing this average, you’ll have a benchmark price to compare your own product’s rates to.
Choose higher, lower, or matched prices
After researching competitors’ pricing, you’re ready to determine where your product or service fits into the market.
- Higher-than-average price: When you want the premium price to signal luxury to potential customers
- Lower-than-average price: When you’re trying to undercut the competition with a low price and acquire customers quickly, competitive pricing examples of this include loss leaders
- Matched price: When your pricing strategy will be in line with your competitors
Whether you’re just entering the market or working to solidify your current standing, the price you choose will inform you of the customers' perceived value of your brand. Just remember that competitor-based pricing, like most simple pricing methodologies, doesn’t optimize your company for growth.
Competition-based pricing risks across four companies
In this example, companies A, B, and C have used competitor-based pricing as a part of their business strategy and gained and lost revenue alongside one another. Company D went with a more well-rounded approach and, while starting lower, grew more effectively over time.