Competitive pricing involves setting prices based on those of competitors. Business owners must decide whether to charge more, less, or the same amount as competitors. Undercutting competitors can lead to a price war and is closely monitored by governments to prevent anti-competitive practices.
Competitive pricing is the process of setting prices for goods and services based on those of a competitor. Deciding whether to charge more, less, or the same amount as your competitors is an important part of your pricing strategy. Typically, competitive pricing is analyzed in terms of undercutting the competition or charging below market. However, there is a fine line between healthy competition and illegal anti-competitive practices. Business owners need to ensure that competitive pricing does not deviate from prohibited predatory pricing.
One of the most basic decisions a business owner has to make is what to charge for his company’s goods and services. Theoretically, the business owner has three options. He can locate other companies selling the same or similar products in his part of the country and align his prices with current market prices. Alternatively, he can try to distinguish his products as better than those currently on the market and apply a premium. Finally, he is able to price his products lower than the market, effectively undermining the competition.
These pricing strategies are the basis for competitive pricing. Entrepreneurs make important pricing decisions based on the relationship they want to have with their competitors. Setting prices at or above market rarely causes a business owner problems with other landlords. Conforming to the market sets business on a course to maintain the status quo. Setting a premium price creates a new market and requires a marketing strategy focused on convincing consumers of a product’s unique attributes that justify a higher price.
However, undercutting competitors can have various repercussions. This kind of competitive pricing draws customers right out of competitors’ pockets. A business environment is more likely to become hostile if you start a new business that intends to use lower prices to attract customers. Such a tactic can lead to a price war, where companies go back and forth with price cuts. Price wars are beneficial for customers but are not sustainable for the companies involved.
Governments closely monitor price undercutting. While ordinary competitive pricing is encouraged, setting low prices to drive a competitor out of business can be seen as predatory anti-competitive pricing that makes the market more susceptible to monopoly. Typically, if a business owner can set lower prices due to an efficiency in his business operations, it is considered a simple competitive price. However, if an entrepreneur uses cash reserves to support lower prices and raises prices once he drives a competitor out of business, the strategy will likely be considered predatory.
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