Pricing Strategies

What is Competition Based Pricing and Why Do Businesses Use It

By June 20, 2020July 1st, 2020No Comments

Businesses that want to create the right brand image and succeed in their operations focus more on the pricing of the goods and services they offer. Customers always look for reasonably priced alternatives. Thus, it can be quite tricky and challenging for businesses to set the right price for their products and services. It must persuade the customers to buy your product and match the price they are willing to pay for certain things.

Businesses evaluate and implement various pricing methods to determine the best strategy. It is important to select and use the right method as each strategy has a different impact on each business. Furthermore, choosing the right method comes down to collecting the necessary information to understand the customer’s preference for buying a particular product or service at a specific price.

Competition-based pricing or strategic pricing is a popular method in mainstream business. This post covers everything regarding competition-based pricing, what it is, why it is beneficial, and its impact on a business. Continue reading to know if this is the right strategy for your business.

What is Competition-Based Pricing

Competition-Based pricing refers to the process of determining strategic price points to take advantage of a particular product or service in the market. Usually, businesses selling products adopt this method as it is common to have a competitor selling the same product; two businesses may sell the same product but offer different services.

Therefore, this pricing strategy helps businesses tackle the competitor’s pricing strategies and offer customers a better price for the product than the competition in the market. Businesses often adopt this method when the product’s price has reached a level of equilibrium. This refers to the point when there are many substitutes of the product since it has been in the market for quite some time.

With this method, businesses can set the price for a product/service using one of the following options:

  • A price that is below the competitor’s price
  • A price that matches the competitor’s price
  • A price above the competitor’s price

When and Why Should a Business Use It?

Many businesses don’t understand how competition-based pricing can be helpful. Well, retailers can use this pricing strategy to their advantage in numerous ways. As mentioned, competition-based pricing is the process of copying the pricing strategy of your competitors.

Therefore, a startup or a business that isn’t doing well in the market will find this strategy helpful as it provides the data and information needed to determine the right price.

A business can see whether the price a competitor has set or the pricing strategy they use is benefitting them. This way, the business can either set the same price or even a lower or higher price than its rival to improve sales operations.

Moreover, businesses in highly competitive and well-established markets can also use this strategy when the product has reached the equilibrium price level. Some businesses use this method in combination with other strategies, such as penetration pricing.

Examples of Competition-Based Pricing

Many businesses/brands use competition-based pricing methods. Let’s have a look at a simple example to create a better understanding of this strategy.

For instance, a business decides to set a new price for a toaster. They will conduct market research to find the prices their competitors have set for that similar product. Let’s suppose the competitor is selling the toaster for $25; the business will use this price as a benchmark. It may set the same price for their product or go slightly higher or lower than the competitor.

Cellular networks, auto-dealers, banking and financial services, etc. all use competition-based pricing. Besides, fruit-sellers, butchers, and retailers also adopt this pricing strategy.

Do You Know Your Competitors Prices? Click Here to Start Tracking Them Today!

Advantages and Drawbacks

Businesses use this method as it has many advantages; however, there are some issues that a business may face using this method.

The Advantages

  • It’s quite easy and simple to implement
  • Data is available since there is always competition
  • Highly effective when used with different strategies
  • Helps increase brand image

The Drawbacks

  • Does not focus on customers interests; this strategy solely focuses on competitors pricing instead
  • Is not a good strategy for small retailers
  • Business tend to focus less on other factors such as a drop in profit margin etc
  • Competitor’s prices may change due to the higher demand for their product. Therefore, setting a higher price to compete with the pricing may affect your sales.

Should A Business Use It?

Well, this pricing strategy offers some great advantages for retailers. If used the right way, a business can get a competitive edge in the market. Businesses have one goal, and that is to operate better than the rivals in the market. This method allows a business to understand the competitors’ pricing strategy and evaluate why it is good for them.

For instance, a well-reputed business selling a good at a high price could mean the quality of their product is excellent. Therefore, it will help you assess the quality of your product and set the price. One thing businesses must understand that customers buy certain products to fulfill their needs. Therefore, the price doesn’t matter. However, customers will go for the same product if they can find the same product at a lower price.

On the other hand, since this pricing method focuses more on the competition and less on consumer demand, it can hurt a business. So, it is better to use this method with other strategies that allow a business to focus on other factors as well that influence pricing. For instance, you must focus on factors, such as market value, customer value, cost of goods, etc. when finding an optimal price.


A business can use several methods to achieve success and build a reputation in the market. It is important for a business to collect as much information possible so that they can evaluate the best pricing strategy for its products. Many businesses use methods without doing proper research, and therefore, have to deal with serious problems.

The competition-based pricing strategy is an effective way of understanding your competitor’s operations and success pattern. This can help you in following that path and taking advantage of it, which can eventually help your business outshine the competition.

Do You Know Your Competitors Prices? Click Here to Start Tracking Them Today!

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