What Is Competition-Driven Pricing?
Competition-driven pricing is a method of pricing in which the seller makes a decision based on the prices of its competition. This type of pricing focuses on how that price will achieve the most profitable market share but does not necessarily mean it will be the same as the competition.
Understanding Competition-Driven Pricing
Competition-driven prices are often market-oriented and are set based on how others are pricing products and services in the marketplace. So, the seller makes a decision based on the prices set by its competitors. Prices between competitors may not necessarily be the same; one competitor may end up lowering its price.
This type of pricing can also be known as competitive pricing or competition-oriented pricing.
What to Consider for Competition-Driven Pricing
Businesses should first do plenty of research before taking on any type of competitive pricing strategy.
First, a company must fully understand where it stands in the market. Who is the target market? What is the company's position compared to its competition? By answering these questions, a business can safely determine whether competitive pricing is the right strategy.
Another factor to consider is cost vs. profitability. Determining how to profitably achieve the greatest market share without incurring excessive costs or other burdens means the need for additional strategic decision making. As such, the focus should not solely be on obtaining the largest market share, but also in finding the appropriate combination of margin and market share that is most profitable in the long run.
Pros and Cons of Competition-Driven Pricing
Like any other strategy, there are always two sides to every coin. Competitive pricing may bring in more customers, thereby driving up revenue. That can also lead to more customers buying other products from that business.
On the flip side, competitive-driven pricing can bring the risk of starting a price war, or a competitive exchange among rival companies that lower prices to undercut each other. Price wars usually lead to a short-term increase in revenue or a longer-term strategy in order to get the most market share.
There is also the belief that this type of pricing strategy does not always lead to the maximization of profits. The reason behind this is that businesses end up losing sight of the value to the customer or to their overall costs. If prices are low and costs are high, it negates any potential for profits the business may have.
A business can still be undercut by its competition by price matching, or when one retailer promises to match the price of another's. This strategy helps a business keep its loyal customer base even if prices may be higher elsewhere.
Example of Competition-Driven Pricing
The best real-life examples of competition-driven pricing strategies can be found in your local grocery or department stores. Prices for staples such as milk, bread, and fruit tend to be highly competitive between grocery store chains. Even big-box stores like Wal-Mart and Kmart often engage in competitive pricing strategies to bolster profits and retain market share.