Competitive Pricing 101: Avoid Price Wars, Save Profit Margins

Consumers have access to more information than ever before. Constant internet access means they’re never more than a few clicks away from finding out which comparable products your competitors sell—and whether they’ll get a better deal elsewhere. 

Price is the most influential factor in seasonal purchasing decisions, beating convenience, delivery speed, and free return options. But it’s not just ecommerce where price comparisons plague retailers. One in five people “nearly always” consult their mobile device to compare pricing options while shopping in-store.

Competitive pricing pits your inventory against a competitors’ comparable product. The goal? To see whether you’re alienating shoppers by overpricing, or losing out on profit with too steep of a discount. 

What is competitive pricing?

Competitive pricing is the process of benchmarking the price a competitor is selling comparable products for. 

Looking at competitors’ prices helps you understand the options in the market. From there, you can evaluate how your product is positioned across those sets of options. This aligns the positioning, value propositions, and price to build customer perception. You’ll be able to tell the complete story of your product to consumers. 

Absence of competitor pricing creates blind spots to how your consumers really perceive you in the market. Is your product a bargain that’s worth the money? Or a splurge they’ll likely regret? Answers to either could mean missing out on sales and profits. 

Price too high and you miss out on potential customers. Price too low and sell products for less money than they’re worth.

What are three types of competitive pricing?

There are three types of pricing: penetration, promotional, and captive pricing. Here’s a breakdown of all three models with advice on when to use each. 

Penetration pricing

Penetration pricing is when you’re competing against competitors to offer the lowest price. The goal is often to quickly grab consumers’ attention and market share. 

This intense cost discount to maintain competitiveness means you will sacrifice profitability—unless you have economies of scale. Department stores like Costco, for example, can offer items at the cheapest price only because they have millions of customers driving (albeit small) profits. 

The penetration pricing model is successful if you build a relationship with buyers after their first purchase. Continue to cross-sell and upsell with more profitable product offerings once you’ve won them over on price. 

Pros ✅

• Competitor-beating prices attract customers’ attention. 
• Low customer acquisition costs (CAC) for digital marketing campaigns. The target audience is more likely to click and buy advertised products if they’re cheaper than the same products offered by a competitor. 
• It’s a relatively simple growth model for scaling ecommerce brands. People try your products because it’s cheaper than what they find elsewhere. Continue the post-purchase relationship to build a customer base relatively quickly.

Cons ❌

• Many small businesses can’t afford to take initial losses to gain market share. 
• Always-cheapest prices reduce brand value and attract least profitable customers with an objection to spending more. You’re banking on shoppers to buy at volume and frequency. 
• Gradual price increases—to a point where products are more expensive than competitors’ products—means a risk of losing an existing customer base, especially if low prices were the deciding factor of their previous purchases. 
• Competitors can match and undercut your prices, making this model a race to the bottom. There may come a time when you’re unable to compete if you’re limited by the cost of production.

Promotional pricing

Promotional pricing is when you want to temporarily discount your products for a limited time. This makes sense when you are trying to clear inventory, build hype, or draw attention to your brand. 

“Other countries do not discount like we do. We’ve trained American consumers to just wait for everything to be on deal.”

Promotional prices are most successfully used intermittently to bring attention to your brand and draw in new customers. However, the risk of promotional pricing is, when your sales and discounts become predictable, consumers will wait until products go on sale and not pay full price. This can devalue your brand and bring the wrong type of customer to your business.

Pros ✅

• Products aren’t anchored to a low price. Customers know they’re buying a special deal. 
• New customers have a low-risk chance to try your product. This builds brand affinity—shoppers will be more likely to purchase higher-priced products from your brand if they know it’s worth it. 
• Flash sales incentivize impulse buys—something the average US consumer spends $5,400 on each year. There’s an incentive to buy the product right now before the price shoots up.
• Quickly and easily liquidate inventory at the end of season. It’s cheaper to sell outdated inventory than store it in a warehouse, even if it’s being sold for less than the recommended retail price (RRP).

Cons ❌

• Too many flash sales can deteriorate brand perceptions. You’ll be known as the “discount” or “on sale” brand.
• Too good of a deal on a product (when compared to a competitors’ pricing model) can make your inventory seem cheap, even though it may not be.
• People wait for predictable sales, such as month-end or Black Friday deals. You cannibalize profits around those sale dates if it becomes too predictable. People hold off on buying something if they know they can get it cheaper by waiting.

Captive pricing

Captive pricing is when you offer a suite of complementary products, with the core item being priced competitively. This pricing strategy is very effective when you have additional items that add functionality or extend the life of the core product. 

Take printers, for example, which are often on sale or priced very affordably. The catch comes once ink is out. Refills become expensive relative to the original printer cost.

Similarly, video game consoles are sold at cost, while games and accessories—both of which are promoted alongside the console—have higher profit margins. 

Pros ✅

• Captive pricing is not seen as a “discount” and therefore not brand deteriorating.
• It’s a longer term model for sustainable, predictable revenue. When people buy core products at a great price, they return for add-ons. This improves customer lifetime value.
• Build a moat around your brand. Apple, for example, has a 25% profit margin for Macs. The brand makes its money back when loyal customers purchase high-profit add-ons like hardware, Apple Music subscriptions, and cloud storage. These additional services have a much higher profit margin (59%).
• It’s the most product-aligned competitive pricing strategy. If the core competitively priced product is a diffuser, for example, additional higher-priced essential oils help people get more value from the core product. 

Cons ❌

• It’s a more complex pricing model that needs to sit alongside a comprehensive product strategy. You need to consider your entire inventory, popular bundles, and how you’ll promote similar products at a higher cost. 
• Discount codes are rarely offered (unless combined with another discount strategy, like if the core product is sitting unused because a customer hasn’t purchased add-ons.)
• There’s a risk of negative PR when the price of add-ons is too expensive. Instax customers, for example, regularly complain about the price of film being too expensive in comparison to the actual camera.

How are prices determined in a competitive market?

In a competitive market, prices are largely determined by supply and demand. Market comparables help businesses create boundaries of how much customers will pay for its products. 

If your product offers more value to shoppers relative to competitors, set premium prices. If your product is mostly the same, you should price closely to main competitors—unless you can find differentiation for your targeted customers.

How to do a competitive pricing analysis

Ready to compete with competitors on price? Here’s how to conduct a competitive price analysis and set prices against competitors’ comparable products. 

1. Understand your product

The first stage in a competitive pricing analysis is to understand how your product stands against the competition. Create a comparison table and have the first column detail your product’s:

• Key features 
• Target market
• Value proposition
• Costs and margins to evaluate if your new pricing strategy will be profitable

Get a thorough understanding of this pricing data by pooling responses to customer surveys. Your post-purchase confirmation email should ask questions like, “Why did you purchase this product?” Answers guide you toward completing this section of your competitive analysis table.

“At Nolah, we offer competitor comparisons directly on our site because we know how deeply it matters to consumers to get the best product at the best price. Along with other dynamic factors, like our USA-based production and patented mattress technology, we know offering competitive pricing is hugely important to people committing to the purchase of a mattress.”

2. Compare competitors’ products

Creating a table of prices and features often helps clearly articulate how your product is different from and similar to a competitors’.

Look to credit card comparison websites for inspiration on what this table should look like. Credit Card Insider, for example, lists the annual fees, APR rates, and minimum credit level score required to secure a credit card from popular banks:

In your comparison table, note how competitors market and position their products. 

Do they have the same target market as your product? If not, who are your competitors trying to reach? Both of these elements impact the price of a product. Some customer personas are willing to pay a premium if the product is important in their daily routine. (More on this later.)

Jay Soni, Marketing Director at Yorkshire Fabric Shop, adds that competitors’ price variations should be considered as well: “Consider discounts, how frequently they conduct sales, and how much they discount when they do. All of these things are especially significant when you have a similar inventory.”

Finally, list the retail price point each competitor is selling their comparable product for. Triangulate the complete list and you’ll see the boundaries of your prices relative to the market. 

3. Optimize and learn

Once you have a range of prices and know how yours differs from competitors, run A/B tests for a few prices in your range to determine which prices perform best. 

If you’re selling a $50 item compared to a $45 competitor’s product but you still find people purchasing yours, there’s no need to cut the $5 difference and shrink your profit margins. 

Similarly, if your competitor is selling a $50 item and yours is $75, people may continue paying your higher price if quality is superior. A few tweaks to your product pages, advertising creatives, and marketing strategy reinforce that idea to future customers and prevent them from asking why yours is worth the extra $25.

4. Repeat the process often

Competitors make price changes, new products come to market, and brands invest in product quality—which in turn, causes price increases.

Repeat this process every quarter to see whether your products are overpriced or too cheap. 

How to do a competitor-based pricing strategy

Ready to benchmark your product prices against competitors' prices? To prevent losing out with unnecessary price cuts, here are five things to consider when doing a competitor-based pricing strategy.

Don’t default to price matching

A common mistake many merchants make is constantly matching or sometimes beating competitor prices, especially when not required. 

Aggressive price matching can lead to price wars. Multiple competitors begin to discount their products, driving overall profitability in a segment down—a lose-lose scenario for everyone involved. 

“Competitive pricing is often talked about as a way to undercut competitors and offer lower prices, but that isn’t always the smartest strategy, so don’t fall into that trap and end up undercutting your own growth.”

Not only will profit margins take a constant hit, but studies show that consumers use price to determine a product’s quality. 

Braden Norwood, product quality manager at VTR Learning, says “From first-hand experience, setting prices too low can cause customers to wonder whether the quality of the product is on-par with competitors. Benchmarking is just as much about helping customers psychologically value your product as it is about giving them an affordable alternative to other options.”

Consider product quality

Not all products are created equal. Many customers pay a premium for quality.

If we did a competitive pricing analysis for a brand selling plain white t-shirts, for example, there can be $100+ differences depending on whether each item is made with sustainable materials, sold by a well-known brand, or manufactured in the US. 

Consider this in your pricing comparison table. Scan competitors’ product descriptions, reviews, and specifications to determine how they came up with the price. There’s leeway to charge extra for your product if it’s better quality. 

Evaluate customer segments

It’s not just product quality that impacts price. Different customer groups are willing to pay different prices for similar products. 

Here are some examples you might find through your competitive pricing analysis:

• Students are on tighter budgets than 50-year-olds. 
• Metallica fans pay more for merchandise than Rolling Stones fans. 
• Amazon shoppers are more price-sensitive than social media buyers.
• Customers of a hot dog stand in the East End are more willing to pay a premium for convenience than those in the West End. 

Go back to your competitive price analysis and compare the target market for each competitor. Find the brand selling products with the biggest overlap with your own target market for accurate comparisons.

Save competitive pricing for subscriptions

Not all items have to be competitively priced. Save your best deals for customers who purchase repeatedly to build customer loyalty, increase customer lifetime value (CLV), and generate predictable revenue. 

OLIPOP, for example, incentivizes customers to buy its subscription bundles instead of single drinks. Its director of customer experience and retention, Eli Weiss, explains that online shoppers get competitive prices if they purchase cartons through its subscription model:

Beat competitors on price and quality

When making pricing decisions, don’t benchmark competitors’ retail prices in silo. The dollar amount an item is worth depends on the quality, usage, and target market. Basing yours off the first competitor you see is a mistake.

Build a comparison table that pits competitors’ comparable products against your own, but don’t be afraid to price higher than them. So long as you can prove yours is worth the extra money, your profit margins don’t have to shrink to remain competitive. 

Illustration by Jon Krause