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Unlock This CourseImagine you're shopping for a new phone and you see the same model priced at £300 in one shop and £350 in another. Which would you choose? Most people would pick the cheaper option! This is exactly why businesses use competitive pricing - setting their prices based on what their rivals charge.
Competitive pricing is one of the most common pricing strategies used by businesses today. It's especially important in markets where products are very similar, like petrol stations, supermarkets, or mobile phone contracts.
Key Definitions:
Businesses use competitive pricing to stay relevant in the market. If your prices are much higher than competitors, customers might switch to cheaper alternatives. It helps businesses attract price-sensitive customers and maintain market share without having to guess what price customers will pay.
There are several ways businesses can use competitive pricing. Each approach has different goals and works better in different situations.
Businesses can choose to price above, below, or exactly the same as their competitors. The choice depends on their brand positioning, quality and business goals.
Setting prices lower than rivals to attract customers. Used by discount retailers like Aldi and Lidl. Works well for businesses focusing on value and cost leadership.
Matching competitor prices exactly. Common in petrol stations and utilities. Reduces price competition and focuses attention on other factors like service quality.
Charging premium prices while monitoring competitors. Used by luxury brands like Apple or premium supermarkets like Waitrose. Suggests higher quality or better service.
In 2014, UK supermarkets engaged in intense price competition. Tesco, Sainsbury's and ASDA all cut prices to compete with discount chains Aldi and Lidl. This led to reduced profit margins across the industry but benefited consumers with lower grocery bills. The "Big Four" supermarkets had to rethink their strategies, focusing more on quality and convenience rather than just competing on price.
Before setting competitive prices, businesses need to know what their rivals are charging. This requires systematic research and monitoring.
Businesses use mystery shopping, online price comparison tools, competitor websites and industry reports. Some hire specialist companies to monitor prices daily. Social media and customer feedback also provide pricing intelligence.
Successful competitive pricing requires ongoing research and analysis. Here's how businesses typically approach it:
Competitive pricing offers several benefits that make it attractive to many businesses, especially those in crowded markets.
Following market prices reduces the risk of pricing mistakes. If competitors have done market research, their prices might reflect what customers are willing to pay.
Competitive prices help keep existing customers from switching to cheaper alternatives. This is crucial for maintaining market share.
While competitive pricing has benefits, it also comes with significant challenges that businesses must consider.
Competitors might keep cutting prices, leading to a destructive cycle where everyone's profits suffer. This happened in the airline industry with budget carriers.
Matching low competitor prices might not cover all costs, especially if competitors have lower operating expenses or different business models.
Apple typically prices above competitors, positioning itself as premium. Samsung often matches Apple's high-end prices but offers mid-range alternatives. Chinese brands like Xiaomi and OnePlus use competitive pricing below established brands to gain market share. This shows how different competitive pricing strategies can coexist in the same market, with each brand targeting different customer segments.
Competitive pricing isn't suitable for every business or situation. Understanding when it's most effective helps businesses make better pricing decisions.
Competitive pricing tends to work best in specific market conditions and business situations.
When products are very similar or identical, like petrol or basic groceries, price becomes the main differentiator for customers.
Markets where customers actively compare prices and switch for small savings, such as insurance or utilities.
Mature markets with many competitors where price competition is already common and expected by customers.
Smart businesses often combine competitive pricing with other strategies to avoid the pitfalls of pure price competition.
John Lewis built their reputation on price matching with their famous slogan "Never Knowingly Undersold." They promise to match competitor prices while maintaining their reputation for excellent customer service and quality. This strategy allows them to compete on price while differentiating on service, showing how competitive pricing can work alongside other marketing mix elements.