Definition, Examples, and Loss Leaders

What Is Competitive Pricing?

Competitive pricing involves setting prices strategically to capitalize on a product or service market relative to the competition. Often used by businesses selling similar products, this strategy becomes prevalent once a product has stabilized in the market with numerous substitutes. Approaches include pricing above, at, or below the competition, each with its own strategic focus—from premium pricing, demanding quality provision, to loss leader strategies, aiming to draw customers to profit-generating offerings.

Key Strategies for Competitive Pricing

Businesses have three options when setting the price for a good or service: set it below the competition, at the competition, or above the competition.

Setting prices above the competition requires businesses to offer added value, like better payment options or extra features. To charge a premium price, a business should focus on quality instead of competing on cost.

A business might price below the market and accept a loss, hoping customers will buy more products once they encounter other offerings. The profitability of the other products can then subsidize the economic loss incurred on the below-market priced product. This is also known as a loss leader strategy.

Lastly, a business can choose to charge the same price as its competitors or take the prevailing market price as given. Even if a business sells products at the same price as competitors, it can differentiate itself through marketing.

Premium Pricing: Differentiating Your Product

For a business to charge an amount above that of the competition, the business must differentiate the product from those created by competitors. For example, Apple employs the strategy of focusing on the creation of high-end products and ensuring the consumer market sees its products as unique or innovative. This strategy requires not only improving the product or service itself but making sure customers are aware of the differences that justify the premium pricing, through marketing and branding.

Exploring Loss Leader Strategies

A loss leader is a good or service being offered at a notable discount, at times resulting in a loss if the products are sold below cost. The technique looks to increase traffic to the business based on the low price of the aforementioned product. Once the potential customer enters the store environment, shifting to the role of customer once the decision to purchase the loss leader is made, the hope is to attract them to other store products that generate a profit. Not only can this attract new customers to a store, but it can also help a business move inventory that has become stagnant.

At times, loss leader prices cannot be officially published as a minimum advertised price has been set by the manufacturer. Some states also prohibit this practice.

Leveraging Price Matching Offers in Competitive Pricing

When a company is unable to anticipate competitor price changes or is not equipped to make corresponding changes in a timely fashion, a retailer may offer to match advertised competitor prices. This allows retailers to match competitor prices without changing the prices in their point-of-sale systems.

For example, in November 2014, Amazon projected price changes to approximately 80 million items in preparation for the holiday season. Other retailers, including Walmart and Best Buy, announced a price-matching program. This allowed customers of Walmart or Best Buy to receive a product at the lower price without risking customers taking their business to Amazon solely for pricing reasons.

The Bottom Line

Competitive pricing allows businesses to strategically select price points to leverage their market position relative to competitors. Companies can choose to set prices below, at, or above the competition, each strategy having its own implications. Premium pricing demands differentiation to justify higher costs, while loss leaders can attract customers to additional profitable offerings. Understanding these strategies can help businesses tailor pricing to their market dynamics, ensuring competitive advantage and customer engagement.