Competitor based pricing is a strategy where the price of your product or service is determined based on your competitors' prices. This approach involves monitoring and analyzing the prices offered by your competitors and then setting your price relative to this information.
When using this pricing strategy, you must continuously monitor your competitors' behavior, which can be a significant task if done manually. By keeping an eye on your competitors, you stay updated on the market and understand what your customers are willing to pay for your product based on this data.
One disadvantage of this pricing strategy is the risk of emerging price wars. This happens when competing companies continue to lower their prices based on their competitors' pricing. If a company isn't careful, it can quickly harm its business and supplier relationships.
The purpose of this pricing strategy is not necessarily to set your prices lower than your competitors. You can also set the price higher to signal high quality or exclusivity, while the lower price often helps attract more customers to your business, potentially leading to more products in their shopping carts.
When you raise your prices instead of lowering them, you can also contribute to the opposite effect of a price war. Here, you help push market prices up instead of down. With PriceShape, you can target the highest possible profit within a specific profit range.
When is it relevant for me as an E-commerce business to use this strategy?
An effective pricing strategy should always consider your competitor's prices and internal factors to maximize your company's revenue and achieve competitive advantages.
Therefore, having the correct pricing insights is important to keep up with market trends. If you find yourself in the scenarios below, it is especially important to use Competitor based pricing:
When the market is price-sensitive: Competitor based pricing can be good if very price-conscious customers characterize your market. Using this strategy, you can attract and retain customers in the competitive market by offering competitive prices.
When your product is substitutable: It is important to know your competitors' pricing if your product has multiple alternatives or substitutes.
When launching new products or services: Competitor based pricing can help you determine an appropriate price position when introducing a new product or service.
When there are changes in the competitive situation: If there are changes in the competition, such as a new competitor entering the market, it can be a good idea to review and adjust your prices accordingly.
Tailoring your pricing strategy for each marketplace
Competitor based pricing can vary significantly across platforms, so building a marketplace sales strategy that accounts for different competitors and pricing trends is essential. Each platform has its own set of competitors, pricing dynamics, and buyer behaviors. For example, a competitively priced product on Amazon might not be positioned the same way on Google Shopping or Bol.
This variation means your pricing strategy shouldn’t be one-size-fits-all. Instead, leveraging marketplace-specific data allows you to build pricing rules that reflect local competition, availability, and consumer expectations. Not only does this help you stay competitive on each platform, but it also opens up opportunities to increase margins where competition is weaker.
What are the advantages and disadvantages of competitor based pricing?
Like any pricing strategy, competitor based pricing comes with its own pros and cons. Understanding both sides can help you decide if this approach fits your business goals.
Advantages:
One of the biggest benefits of competitor based pricing is how simple it is to implement. Instead of spending hours breaking down your cost structure or guessing what customers might pay, you can look at real market data to guide your pricing. It helps you stay aligned with customer expectations and remain competitive, especially in fast moving industries like E-commerce.It also gives you the ability to act fast. If a competitor increases their prices, you might be able to offer a better deal and attract more customers. You'll know if they drop their prices and can respond if needed. With the right tools, this strategy helps you stay agile and aware of what’s happening in your market.
Disadvantages:
That said, relying too much on competitors can be risky. If everyone is constantly reacting to each other, it can lead to price wars where prices keep getting pushed down. That kind of race to the bottom can seriously cut into your profits, especially if your cost structure doesn’t match your competitors.We have a blog about this topic; "How to avoid a price battle with your competitors".
It can also make it easy to overlook your own strengths. If your product offers more value or a better experience, pricing too close to others might undercut what makes you different. Competitor based pricing works best when it’s part of a bigger strategy that still keeps your brand and value in focus.
When should you not use this strategy?
As mentioned earlier, knowing how your competitors' prices look to keep up with market trends is always relevant, but there are exceptions. A Competitor based pricing strategy may not be most optimal if you find yourself in one of the situations below:
Using a value-based pricing strategy may be more appropriate if your products are in the premium segment and focus on delivering exclusive and luxurious goods.
Competitor based pricing may be less relevant if you operate in a niche market where the competition is limited. Focusing on other factors such as value-added, quality, or specialization can effectively determine the price in these cases.
If your company is highly differentiated and value-focused compared to competitors, it may be more advantageous to use a strategy that focuses on communicating and charging a price based on that differentiated value.
Implement the strategy effectively
We can help you implement a competitor based pricing strategy based on the most optimal data. Our tool can easily give you an overview of your competitors and their prices. With real-time updates, you can quickly identify changes and adjust your prices to remain competitive.
We can help you establish advanced rules and pricing strategies. These can define price points, thresholds, discount rules, and other parameters to automate pricing based on your competitor's data.
Lastly, we can help segment your products and apply differentiated pricing strategies based on product categories, brands, or other factors. This allows you to tailor prices to different segments of your customers and competitors.
Read more about how we at PriceShape can help you.
