The Advantages and Disadvantages of Competitive Pricing Strategy
Very basically, competitive pricing strategy, also known market-oriented pricing strategy, is an approach in which e-commerce retailers set their online prices based on competition (competitors, market trends) rather than consumer demands or costs. To be successful and experience the benefits of competitive pricing strategy, retailers should have a solid intelligence gathering system in order to get fresh data from the competition and act with immediate and effective responses towards the competitors. In a nutshell, competitive pricing strategy requires a detailed market analysis.
How Competitive Pricing Strategy Works?
An e-commerce retailer can set their own prices depending on their positioning in the market and strategy. The retailer can aim to be the most competitive in the market, target the average or always be higher than the competition.
For example, if the business addresses high-end customers and offers premium products, it is better to price the products higher than the competitors. This decision will lead fattened margins, high loyalty but also low conversions. On the contrary, if the online retailer aims to boost their sales, it may price their products at lower prices and be the most competitive in the market.
To make competitive pricing analysis efficient today, retailers need to automate it because matching all the products with competitors and tracking them manually means a lot of time waste. So, to make it more productive and beneficial, using e-commerce technologies such as competitor price tracking software would be a wise decision. With the ability of these smart services, you can better focus on analysis, make strategic decisions and know your real position in the market instead of just spending your time by gathering data from the market.
Now let’s expand our knowledge by analyzing advantages and disadvantages of competitive pricing strategy.
As with almost every business and e-commerce pricing strategies, competitive pricing strategy contains some advantages and disadvantages.
Advantages & Opportunities
1- Competitive pricing strategy let the business to control the competition by preventing losing market share and customers to the competitors. Assuming you’ll have the adequate intelligence from the competitors through right technology. By the aid of that intelligence, you can respond every move of your competitor. As a result, you can better position your business towards different strategic decisions of competitors and won’t lose your customers because of the price wars.
2- Pricing is considered as one of the most important criteria for online shoppers while making their final purchase decision. More than %90 marked pricing as the first indicator. Moreover, according to the e-commerce pricing facts, an average online shopper will visit at least 3 websites before finalizing their purchase. By facing with these facts, we can clearly say that online shoppers give importance to the pricing and price comparison. As they are a good deal hunter, believe me, they don’t hesitate even one second to prefer one of your competitors if your prices don’t satisfy their perception. So from the perspective of online shoppers, adapting competitive pricing strategy will help you to keep your customer base stable and let your business grow by always offering competitive prices.
3- With the competitive pricing strategy, you’ll take the first steps of dynamic pricing, a more sophisticated approach that stands at the top of competitive pricing strategy. In dynamic pricing, frequently updated competitor pricing information can be used as a triggering factor to update your own prices depending on certain pricing rules for your product assortment. With the abilities of the dynamic pricing, you’ll be able to compete better in the industry and allows you to maximize profits with each customer.
4- Competitive pricing strategy can be combined with some other pricing strategies to make it even more efficient. For example, to hold the profitability through competitive pricing strategy, online retailers should always keep their costs in mind, and use a mixed approach, where cost-based pricing may decide on the target profit margins according to the competitor pricing.
5- Competitive pricing strategy does not only mean cutting your prices. There are some opportunities to increase your prices while monitoring the competition. For example, sometimes, your prices may be too low when compared to other retailers in the market, so even lifting up the price by 5% or 10% isn’t really likely to affect your competitive position. This is an opportunity to test a price increase, improving your profit margins and still being the most competitive in the market. The best way to realize that opportunity is acquiring an automated competitor price tracking software. By gathering price intelligence data from the market, you’ll have a clear view of your price positioning among your competitors and detect the price differences won’t be a hassle for you.
Disadvantages & Risks
1- If a retailer just focuses on competing with the other players in the market, they may miss covering production and overhead costs. As a result, there is a risk of losing from margins.
2- The situation at above is valid if you are selling premium products. For example, in the luxury market, online shoppers tend to feel more special and don’t care about the prices. So, trying to be competitive in such industries may harm the customer loyalty and brand value. It is better to mix consumer-oriented and market-oriented pricing strategies in these scenarios.
3- By setting the competitive pricing intelligence, retailers assume that competitors have priced their products correctly. But, the pricing strategy of competitors may not fit with the company and it causes disharmony in the company. So, it would be better mix competitive pricing with some other strategies.
4- For small-sized companies, creating the resources such as technologies, money, new staffs to sustain competitive pricing strategy be a hassle.
Originally published at blog.prisync.com on February 21, 2018.
