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What is 'Competitive Pricing'

Competitive pricing is setting the price of a product or service based on what the competition is charging. This pricing method is used more often by businesses selling similar products, since services can vary from business to business, while the attributes of a product remain similar. This type of pricing strategy is generally used once a price for a product or service has reached a level of equilibrium, which occurs when a product has been on the market for a long time and there are many substitutes for the product.

BREAKING DOWN 'Competitive Pricing'

Businesses have three options when setting the price for a good or service: set it below the competition, at the competition or above the competition. Above the competition pricing requires the business to create an environment that warrants the premium, such as generous payment terms or extra features. A business may set the price below the market and potentially take a loss if the business believes that the customer will purchase additional products from their business once the customer is exposed to the other offerings.

Competitive Pricing and Price Matching Offers

When a company is unable to anticipate competitor price changes or is not equipped to make corresponding changes in a timely fashion, a retailer may offer to match advertised competitor prices. This allows the retailer to maintain a competitive price point for those who become aware of the competitor's offer without having to officially change the price within the retailer’s point of sale system.

For example, in November 2014, Amazon projected price changes to approximately 80 million items in preparation for the holiday season. Other retailers, including Walmart and Best Buy, announced a price-matching program. This allowed customers of Walmart or Best Buy to receive a product at the lower price without risking customers taking their business to Amazon solely for pricing reasons.

Premium Pricing

In order for a business to charge an amount above that of the competition, the business must differentiate the product from those created by competitors. For example, Apple employs the strategy of focusing on the creation of high-end products and ensuring the consumer market sees its products as unique or innovative.

Loss Leaders

A loss leader is a good or service being offered at a notable discount, at times resulting in a loss if the products are sold below cost. The technique looks to increase traffic to the business based on the low price of the aforementioned product. Once the potential customer enters the store environment, shifting to the role of customer once the decision to purchase the loss leader is made, the hope is to attract them to other store products that generate a profit. Not only can this attract new customers to a store, it can also help a business move inventory that has become stagnant.

At times, loss leader prices cannot be officially published as a minimum advertised price has been set by the manufacturer. The practice is also forbidden in certain states.

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