Competitor-based Pricing Guide: Advantages & Disadvantages of Competition-based Pricing
Jun 15 2020
A strong competitor-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 upon which you can set prices for your product’s or service’s rates.
Market alignment is a big consideration for SaaS and subscription companies. If you’re not matching up with customers’ expectations on price, whether you’re coming in under or over the current trends, it’s impossible for your company to survive in a competitive market.
Competitor-based pricing is one of the best tools for finding this match. Seeing how competitors build their pricing tiers, what features they differentiate on, and what they use as their core value metric makes it easy to structure your own pricing more effectively.
Today, we’re going to take a look at what goes into an effective competitive pricing strategy and discuss how to build it through research and how to make the right decision for your business. Let’s dive in!
Competition-based pricing is the pricing of goods and services that is based on what the competitors are charging. The term can be used in a broad sense to include any competitive strategy, including product design and marketing decisions, such as targeting niches where competition is low or creating a new product designed to compete with specific competitors.
How to build a competitor-based pricing strategy
A strong competitor-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 to figure out 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 types of pricing and positioning customers expect in the market, so 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
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.
Competitor 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.
Advantages of competition-based pricing
Competition-based pricing is a great first step in finding the best possible selling price for your product or service. Market research gives you a solid base on which to make your pricing decisions. One that’s easy to calculate, quick to implement, and relatively low risk.
Competition-based pricing is easy to calculate and understand. All you have to do is look at the competitors in your market and find the average price they use for their services. From there, you can choose whether to go with a lower or higher price or align with customers’ expectations.
When you set pricing close to competitors’ rates, you don’t have to worry about surprising customers with your price point. You’ll already know that it’s close to what they expect to pay to your competitors. By staying close to the average market price, there’s a good chance customers will be happy to pay your prices.
Evolves with the market
With competition-based pricing, adjusting your pricing doesn’t involve guesswork—you just have to align it with the market. If you see a number of competitors suddenly resorting to certain price changes and are going with higher or lower prices, do the same to your own rates.
Disadvantages of competition-based pricing
While competition-based pricing is simple to execute, it limits your ability to connect the value your service provides with the price it demands. Lacking that connection can set you up for pricing issues in the future.
Detached from other market factors
Competition-based pricing looks only at what other companies are doing in the market. It doesn’t look at the consumer demand for a product or service, meaning it’s very easy to leave money on the table. Increased demand for your products won’t be directly reflected in your competitors’ prices.
Because you’re looking only at how competitors price their product or service, you’re limiting yourself to their knowledge and practice. This means you might not be factoring in other important pricing considerations, like willingness to pay, cost of production, or feature differentiation.
Removed from customers
Competition-based pricing doesn’t consider how customers react to your pricing strategy. Instead, it just focuses on what other companies and market leaders are doing. By leaving customers out of the equation, it’s tough to anticipate how shopping behavior might impact your pricing in the long term. Ultimately, it might take a toll on your profit margin.
Can’t remember all of the pros and cons? Use this graphic to see the competition-based pricing advantages and disadvantages at a glance.
Does ProfitWell recommend competitor-based pricing?
Yes, but not as the “one pricing method to rule them all.” Competitor-based pricing is an excellent tool for understanding the current market and general customer expectations of pricing, but it doesn’t look at the whole picture. SaaS and subscription companies are more successful with a well-rounded strategy that includes competitor analysis, benchmarking, and in-depth research into your own company’s metrics. Check out our guide on value metrics for more information.
Optimize your pricing strategy with ProfitWell
ProfitWell’s Price Intelligently tool is built to help you optimize your pricing strategy. We have a team of pricing experts who are ready, willing, and able to take your SaaS and subscription pricing to the next level. Contact us to learn more!
Competition-based pricing FAQs
What are the three types of competitive pricing?
The three main types of competitive pricing are:
Low price - When you set the prices lower than your competitors
High price - When you set the prices higher than your competitors
Matched price - When you align your prices with your competitors
What are the most common competitive pricing strategies?
The three main competition-based pricing strategies include:
Penetration pricing - By employing a penetration pricing strategy, you are setting your prices lower to penetrate the market by attracting price-sensitive customers who are looking for better deals.
Promotional pricing - Setting limited, promotional deals helps you double the sales, but know that the final profit will be lower than if you kept the original product prices.
Captive pricing - This strategy requires you to group some of your accessory products along with your core product and sell them as a bundle, that way attracting a larger customer volume.
Why do businesses choose competition-based pricing?
Especially startups and small businesses may choose a competitor-based pricing strategy for several reasons. Mainly, when they are launching a new product or service, they want to appeal to target customers by offering the price that people are already accustomed to. Competition-based pricing may also help prevent customers from turning to competitors in the search for a low-cost product/service.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.