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A strong pricing strategy is essential to every organization, and the stakes are high. Set the price too high, and your organization will struggle to make many sales, but set your prices too low, and profits will suffer. It’s easy to see why the path to building a strong competitive pricing strategy is often not all that clear.

Thankfully, there is a huge number of theoretical models, analysis tools, and frameworks that help business leaders make well-informed pricing decisions. In all, there are five key steps to building a successful competitive pricing strategy.

These are:

  1. Industry and competitive analysis
  2. Market research
  3. Aligning pricing strategies with business objectives
  4. Executing pricing changes
  5. Monitoring and adjusting pricing

We’ll cover these five steps in more detail later in this guide. But first, let’s define exactly what a competitive pricing strategy is, and explore a few examples of different pricing strategies.  

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An Introduction to Competitive Pricing Strategies

Competitive pricing strategies can be defined as models used to determine the optimal price for any product or service. A strong pricing strategy ensures organizations can satisfy market demand while driving superior financial returns. 

There are a huge variety of pricing strategies. Some work across any line of business, whereas others are more specific to certain industries. Here are a few of the most common pricing strategies, along with a brief explanation of each:

  1. Cost Plus Pricing Strategy: this strategy takes into consideration the cost of producing a good or service, and adds a fixed margin to this. For example, if an item costs $100 to produce, and the desired profit margin is 20%, the item would be priced at $125. 

  2. Dynamic Pricing Strategy: organizations who employ this strategy adjust their prices based on demand. Examples include hotels, airlines, and event venues, all of which algorithmically calculate prices based on current levels of demand.

  3. High-Low Pricing Strategy: these strategies leverage the feeling of excitement consumers see when products are on sale. After initially selling for a higher price, the product is lowered to a new discounted price. This strategy is common in the CPG industry.

  4. Premium Pricing Strategy: organizations that charge high prices often do so because this conveys to customers that they’re purchasing high quality products and services. Examples of this include luxury or automobile fashion brands.  

These four based pricing strategies are by no means an exhaustive list, but illustrate the wide variety of competitive pricing strategies that an organization might pursue. Now that we’re clear on what a competitive pricing strategy is, let’s explore the steps you should take to start building one for your organization. 

Industry and Competitive Analysis

Begin the process of building a competitive based pricing strategy by conducting a thorough analysis of the market landscape and your key competitors. 

As you analyze the market, pinpoint the key players, identify macro trends, and understand how the industry is set to evolve in years to come. There are a huge variety of tools and frameworks to aid you in this process: Porter’s 5 Forces framework is a great place to start.

When looking at competitors, don’t just focus on based pricing: conduct a more comprehensive analysis. Evaluate each competitor’s core competencies, outline their strengths and weaknesses, and analyze each competitor’s business model and strategies. 

Want to learn more about how to do competitive analysis? Visit our Competitor Analysis Resource Center.

Market Research

Conducting a comprehensive program of market research is a vital component in the design of any competitive pricing strategy. By performing market research, organizations can understand both what customers truly want, and how much they are willing to pay for it. 

There are a variety of ways to conduct market research. When researching pricing strategies, there are a couple that stand out in particular. Primary research methods are especially valuable: consider running a series of focus groups with your target customers to understand what different customers are willing to pay for your product or service, and why. 

By far the most optimal form of market research for building pricing strategies is conjoint research. In a nutshell, conjoint analysis uncovers the true value of a product or service to customers. It explores the trade-offs customers face when making purchasing decisions, and helps organizations determine optimal product configurations and pricing strategies.

Align Pricing Strategies with Business Objectives

Once you’ve thoroughly evaluated both competitors and customers, it’s likely you’ll have a rough idea of what type of competitive pricing strategy is best suited to your organization. Before executing on this however, it’s important to ensure that the pricing strategy aligns closely with the wider business objectives that your organization is working towards. 

Generally, there are three main competitive business strategies: price leadership, differentiation, and focus strategies. Each of these requires different investments, organizational structures, and of course, pricing strategies. 

Consider an example: an organization with major investments in research and development is likely to pursue a premium pricing strategy, because it’s likely they are producing an upmarket product that provides customers with more value than any competitors. Examples of this include brands like Apple and Tesla

Regardless of which type of pricing strategy you decide is right for your business, it’s important to get alignment and sign-off from all the key stakeholders. Building a competitive strategy shouldn’t just involve marketing or sales teams: include the input of stakeholders from all business units, and ensure the leaders of the organization are actively involved as you build out the strategy.

Execute Pricing Changes

Make sure not to rush into the execution of any major changes to your competitive pricing strategy. Changes to your pricing strategy will affect future customers and can also affect your existing customers, so take the time to formulate a measured approach that minimizes any resistance. This is especially true if the pricing strategy you’re adopting will result in a price increase to customers. In this instance, give customers plenty of notice, be prepared to deal with objections, and ensure your customer-facing employees can convincingly justify the changes. 

If you’re changing the pricing strategy for existing products or services, set a go-live date where the organization will officially transition to the new price structure. In preparation, ensure that everything will reflect the new pricing structure: items like sales collateral and price lists are often missed. 

Monitor and Adjust Your Competitive Pricing Strategy

After the transition to any new pricing strategy, it’s important to closely monitor the reaction of customers, competitors, and the broader market. Any number of reactions are possible: you might attract a lot of new customers, or see some of your existing customers churn. A competitor may launch an aggressive strategy in response, or they may do nothing. 

Keeping track of all these changes manually is impossible. Instead, many companies use a Market and Competitive Intelligence (M/CI) platform, like Knowledge360Ⓡ. These platforms enable organizations to monitor their competitors in real-time, helping teams to collect data, discover insights, and collaborate on important work

By identifying trends quickly, organizations give themselves significantly more time to consider their response, and any strategic adjustments that go along with it. It’s important to note that any competitive pricing strategy is unlikely to be perfect upon launch. As you get feedback from customers and observe the response of your competitors, make minor adjustments to improve your pricing strategy. 

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Start Building a Competitive Pricing Strategy Today

If you’re still uncertain about where to start with building a competitive pricing strategy for your organization, the team at Cipher is here to help. 

Our competitive strategy consultants have worked with global organizations across a huge variety of industries, and are vastly experienced in competitive strategy and pricing. To learn more about how they can support your organization, schedule a call