How Competition-Oriented Pricing Works
The pros and cons of setting prices based on the competition
Competition-oriented pricing, also known as market-oriented pricing, means basing the prices of your products or services on those of the competition rather than considering consumer demand and your own costs.
This pricing method also involves analyzing and researching your target market. As with most business strategies, competition-oriented pricing has its advantages and disadvantages.
How Competition-Oriented Pricing Works
When you use a competition-oriented pricing strategy, you set your prices based on those of your competitors. You'll also take into account your business goals and how the difference between competitors' prices and your own will appear to customers.
You may choose to set prices higher than those of competitors if:
- You want to market your business as high-end or exclusive.
- You want to indicate that your products are of better quality than competitors' products.
Or, you may choose to price your products lower than the competition if:
- You want to appear more affordable than competitors.
- You want to draw in customers based on price alone.
You may choose to set your prices the same or similar to competitors if your customers make their choices based on factors other than price, such as brand loyalty, rewards programs, location, or the social values of your business.
Advantages and Disadvantages of Competition-Oriented Pricing
Like any strategy, competition-oriented pricing has advantages and disadvantages that come with a certain level of risk for your business.
- Advantages: Competition-oriented pricing can keep price competition down, which could otherwise damage a business if prices are set too high. It can prevent your business from losing market share to a competitor.
- Disadvantages: Pricing products too low can hurt profits if your revenue doesn't cover production costs or other expenses. When you and a nearby competitor price products too closely, you need other marketing tactics to attract customers, which may cut into profits.
Competition-oriented pricing can also create a passive, rather than active, price-setting mindset. If you are only basing prices on those of competitors, you may not realize when prices need changing based on other factors, such as consumer needs or changes in your market.
How Price Matching Works
Price matching is another form of competition-oriented pricing. If you are unable to anticipate competitor price changes and make timely changes to your own, you may offer to match competitor prices for customers who ask.
This allows you to:
- Maintain competitive prices
- Avoid changing and updating prices in your point-of-sale system
- Continue selling at a higher price to consumers who aren't aware of a competitor's offer
Price matching is only a viable strategy if your competition has similar prices to yours, to begin with. If you are competing with businesses that appeal to different customers, are discounted already, or whose products are lower quality than yours, price matching will significantly cut into your profit margins and lower the value of your products.
Pricing as a Marketing Strategy
Price is one factor in your business's marketing mix. It is one of the first things that consumers are going to associate with your business, particularly when they compare you to competitors. Pricing doesn't just impact your bottom line; it can also change the marketing tactics you need to attract customers and maintain an advantage in your market.
If competition-oriented pricing isn't right for your business or your risk tolerance, there are other pricing methods you can use. You may choose to base prices on consumer demand, your local market, or your production costs. But whether you use competition-oriented pricing or another strategy, the prices of your competitors will be a factor in how your business chooses to set prices and appeal to customers.