Finding the right balance between competitive pricing and profitability can be a real challenge. How do you set prices that attract customers while still ensuring your business thrives? Set your prices too high, and you risk alienating customers; set them too low, and you jeopardise your bottom line. In this guide, we'll walk you through the essentials of competitive pricing to help you make informed decisions that will attract customers and sustain your business. 

What is competitive pricing? 

Competitive pricing is the process of setting the price of your product or services based on what your competitors are charging, rather than their cost. It’s a pricing strategy that ensures you stay attractive to potential customers while maintaining a healthy profit margin. It’s a great strategy for attracting more customers and increasing market share, especially in highly competitive markets. 

Is competitive pricing a good strategy? 

Competitive pricing is an effective strategy for businesses that want to attract customers and increase market share. Other benefits include: 

• Enhancing customer loyalty: Consistently offering competitive prices helps you build loyalty among your customers 

• Improving profit margins: While competitive pricing often involves lowering prices, it can also involve identifying opportunities to charge higher prices if justified. 

• Flexibility in pricing Competitive pricing strategies offer flexibility to adjust prices in response to market changes, competitor actions, and consumer demand. This enables you to remain competitive and responsive in changing markets. 
  

Challenges of implementing a competitive pricing strategy 

Before you embark on a competitive pricing strategy, it’s important to be aware of some of the challenges. 

It requires extensive market research 

To be successful, you must continuously monitor competitor prices, market trends, and consumer behaviour and preferences. You’ll need the time, people, tools and processes to gather and analyse market data and competitor pricing data accurately. 

You risk starting a price war 

Engaging in aggressive price competition can lead to price wars, where you and your competitors continuously lower prices to outdo each other. This could harm the long-term sustainability of your business. 

It might damage your brand’s reputation 

Frequent price changes can affect brand perception. Customers might perceive your brand as cheap or inconsistent. 

How to set competitive prices that don’t jeopardise profitability 

Competitive pricing is a strategic approach that requires thorough research and understanding of your market. Follow the steps below to establish a competitive price for your services.  

Market research is the foundation of a competitive pricing strategy. Before you can set competitive prices, you need to understand what’s going on in the market, who your customers are, and what their preferences are. Understanding these factors will help you tailor your pricing strategy to meet market demands. For example, understanding your customers' price sensitivity and preferences can help you align your pricing with customer expectations. 

After you’ve got a good gauge of the market and your customers, you need to figure out what your competitors are doing. Start by identifying your main competitors and analysing their pricing strategies. Look at their service offerings, price points, and any additional value they provide. This analysis will give you a benchmark for setting your own prices. Here's a handy template that will help you to 

Understanding your costs is crucial for setting a competitive price. Calculate your fixed and variable costs, including labour, materials, and overheads. This will help you determine the minimum price you need to charge to cover your costs and make a profit. Be warned that embarking on a competitive pricing strategy can squeeze your profit margin. Make sure your business is in a position to absorb tighter margins.   

This will depend on your business goals. Objectives can include maximising profits, increasing market share, or achieving a specific return on investment. Knowing this will help you choose the right pricing strategy. 

With a clear understanding of your costs and competitors' pricing, it's time to set your pricing strategy. There are 3 main types of competitive pricing: 

• Lower price strategy – you’re cheaper than the competition  

• Higher price strategy – you’re more expensive than the competition 

• Matched price strategy – you’re the same cost as the competition. In this case, you’d differentiate your product through other means, for example marketing.  

Within these 3 broad strategies, there are several specific strategies. Some of the most commonly used are: 

• Penetration pricing: Setting a low price to enter the market and attract customers quickly. 

• Economy pricing: Keeping prices low to attract cost-conscious customers. 

• Price skimming: introducing a product to the market at a high price, then lowering it over time. This strategy is used to attract early adopters who are willing to purchase at any cost, before broadening the customer base.  

• Premium pricing: Setting a high price to signal high quality and exclusivity. 

• Bundle pricing: Offering a set of services at a discounted rate compared to purchasing individually. 

• Price matching: Setting prices at or below those of competitors to remain competitive in the market. You’ll often see this strategy in large retail stores, where customers are encouraged to bring evidence of cheaper pricing, which the business will then match.  

• Penetration pricing: bringing a new product to market and offering it at a low price to attract customers, build brand awareness, and expand market share. 

• Loss leader pricing: Selling products and services with minimal profit (or at a loss) to attract customers. 
  Demand-based pricing: adjusting your prices in response to changes in demand and market conditions.

It’s important that you test and adjust your prices and price strategy based on market feedback and performance. Continuously monitoring and refining your pricing strategy will ensure it remains effective, and that you can easily respond to changes in the market.  

You might consider gathering feedback on your pricing from your customers or experimenting with different prices through A/B testing.  Check out this article about how you might do A/B testing and HubSpot has some great resources including and A/B testing kit on this subject too.

What's next? 

Competitive pricing is an effective strategy for businesses looking to attract customers, increase market share, and achieve profitability. But it requires careful planning, execution, testing, and refinement. WorkflowMax’s reporting tools give you insights into key profitability metrics to help you test and refine your pricing strategy.

Sign up for a free trial to see how WorkflowMax can help streamline your business. 

FAQs

1. What is the main goal of competitive pricing?

The main goal of competitive pricing is to attract customers by setting prices that are comparable to or better than those of your competitors, while still maintaining profitability.

2. How often should I review my pricing strategy?

Stay It's recommended to review your pricing strategy at least quarterly, but you should also be prepared to adjust prices in response to significant market changes or competitor actions. 

3. Can I use multiple pricing strategies for different services? 
Yes, you can use different pricing strategies for different services. This can help you cater to different customer segments and maximize your revenue.

4. How do I determine the value of my services?

Determine the value of your services by considering the benefits they provide, the quality of your offerings, and how they compare to competitors. Customer feedback and market research can also provide valuable insights.

5. What tools can help with competitive pricing?

There are various tools available, such as price-tracking software, competitor analysis tools, and market research platforms. These tools can provide data and insights to help you set and adjust your prices strategically. WorkflowMax’s reporting features enable you to track profitability metrics to ensure you’re pricing strategy is effective.