When it comes to competitive strategies, you’re either the one who sets rules or the one who follows them. If you’re a leader, then you’re the one who makes the quickest and most accurate predictions, thus setting the price points. Otherwise, you’re a follower, someone who challenges the leader (which may increase profit margin, if you’re doing it correctly).
Want to learn what strategies will help you become a market leader? Keep reading!
Examples of competitive pricing strategies
You’re a challenger
Loss leader strategy is the strategy where you challenge the market leader by proposing an item at an extremely low price. That’s the way you attract customers,
You may unwillingly attract the so-called “cherry pickers” who are hunting low prices. Get to know more pros and cons of this strategy further in this article.
You’re a leader
Use psychological strategy and find the magic price points by testing and simulating different costs. Crossing the round price points like $1, $10, etc. may cause a crash in your sales.
That’s why you so often see candy bars at $0.89 or $0.99.
What makes you a leader?
The fact that you’re not only using the magic points, but you’re even enabled breaking them and to change customer attitude towards them.
That’s when you feel comfortable enough to sell a candy bar at $1.20. Getting buyers used to this price and thereby appreciate the quality they get paying by 21 cents more.
Price elasticity in dynamic strategy
As a leader, you’re setting the prices on the market. To do it thoughtfully, you should calculate the price elasticity: the dependence of sales volume on prices. Contrary to what the marketing managers would like to hear, a single absolute price elasticity of a brand doesn’t exist. It varies in different circumstances.
Good news: there are some concrete patterns in price elasticities. Determining them you may introduce the best working models to your dynamic strategy.
How to choose the best pricing strategies
Before we delve too deeply into the subject of what is competitive strategy, we want to make something very clear for you. A “one-size-fits-all” type of strategy simply doesn’t exist. Additionally, it’s not typical for a business to choose just one. On the contrary, a combination of a few is a lot more beneficial to businesses.
Therefore, you should start out by asking yourself a few questions:
- Is there something, in particular, going into style right now? If you were to go into that industry, what would the breakdown of the expenses look like?
- What group of people are you going to be targeting? Do you know how much the price changes influences their decision to make the purchase?
- Will you be bringing something that hasn’t been done before, will you be attempting to boost the sales of the customer base that already exists, or are you trying to get new buyers?
- Will you be able to influence your loyal customer base with this strategy that you’ve implemented while also catering to new customers?
- Do you know the prices of your rivals and how do their chantes affect your sales?
However, don’t assume that it’ll be a bed of roses from here on out. Pricing isn’t like math. You can’t just stick some numbers into a formula and find out the best price to set your product at. It depends on so many factors.
On top of that, those factors are constantly changing. For example, suppose you’ve got a lot of interest in an item. Logically, you’d increase the price because people are still very keen on buying it.
The opposite applies for when demand isn’t peaking anymore. This strategy may backfire, though. Since prices will constantly change, customers will begin to view the value of your brand in a bad light. They won’t find it trustworthy.
Don’t let this scare you away!
It’s only important to understand the kind of tumultuous environment you’ll be getting yourself into which is full of many questions, risks, and uncertainty.
Now that we have a better overview on the topic, let’s dive into the world of competitive strategies.There are a number of retail strategies out there, but depending on the type of business, only specific ones will be of actual benefit to you.
Loss Leaders pricing
The loss leader is an item that you markdown, hence the loss, in order to bring customers to either your website or into your physical store, which makes it the leader. This item will be sold at a price less than it actually took to make or produce it, but it’s placed next to, or in an area where with another item, but that comes with a heavy markup. Simply because of the smart placement, the customer will purchase both what they came for and the other item, thus covering the cost of the loss and making some profit out of it, too.
Take, for instance, Amazon. They offer their prime membership to first time users and students at a marked down price. However, once the user has signed up, they’ve gained entrance into the world of prime items, where yes, maybe the shipping may be faster, but it does come at a higher price, too. Additionally, since users want their Prime purchase to be justifiable, they tend to purchase a lot more than they would’ve initially, thus covering the cost of the loss that they made with the initial Prime membership within the long run.
Amazon also uses loss leaders by bringing attention to new books. For instance, they price those new books at a discount, but then make sure to surround that book with advertisements and suggestions about numerous other books. These books are priced at a markup. Hopefully, the buyer will purchase both the new book and one at a markup covering the loss from the new one while also making a profit out of it.
Advantages of the loss leader pricing
When done correctly, this strategy can help make sure that your customers keep coming back while also ensuring that a profit is still made. This can be done by:
- Making your loss leader a perishable item. You need this item to be one where a customer will be coming back for more in the future. This will help generate business.
- Making sure that the item placement is one of inconvenience. Therefore, as customers are searching for it, they’ll pass by numerous other items, but that comes with a markup. By the time they reach the loss leader, their cart will be filled with items that will cover the cost of the loss.
- Making it an item that customers buy often. As a result, they know the price of it. When they see it, they’ll have no choice but to buy it because they know how great of a deal it is, which helps guarantee the fact that they’ll be entering your shop in the first place.
Disadvantages of the loss leader pricing
There’s always going to be that risk that consumers (so cold “cherry pickers”) will only purchase the loss leader item, instead of the other item that come with a markup. That’s why placement is crucial. What’s more is that It’s more difficult for smaller businesses to compete with the larger ones because they can’t handle the potential losses associated with this strategy, in contrast to the latter, because they just don’t have the funding for it. As a result, they could end up being swallowed by the competition.
This strategy is one that actually stems from the theory that specific types of prices can psychologically influence shoppers. Take, for instance, the study that had been done by FastCompany.com. You may have noticed how some stores have begun to neglect to add the dollar sign in front of the price. This is done because shoppers find that a price without it seems cheaper than one with it. The research staff at Cornell University decided to test this out how at St. Andrew’s Café in New York.
They had three different menus ready for customers throughout the day. The prices in the first one had dollar signs, in the second one, they were eliminated, and in the third one, they wrote “dollar” instead of including the sign. They came to the conclusion that whenever they omit the dollar sign from the menu, customers spent a lot more than when the dollar sign was present. Even with the word “dollar”, they ended up paying less.
However, that’s just one type of psychological approach.
Three main competitive pricing methods:
Here, companies price their items as high up as they can, so that they can get the attention of consumers that have an eye for luxury. The price helps the item gain the image of that of a premium item only available to the elite. It’s no secret that when possible, people like to have things that others can’t. Take any luxury sports car, such as a Rolls Royce, as your example. They may be ridiculously priced, but that doesn’t stop those with money from buying them.
The problem with the prestige approach is that consumers expect it to be of the highest quality. It has to work perfectly because the price of it not working exceeds the price itself. It also only caters to a small audience. Even when you do decide to attempt to lower prices, your brand will already be associated with extreme ones, thus making it very difficult to extend your customer base.
Round price points
Here, prices are typically set a few cents underneath a round number. It stems from the idea that specific prices, or even a price ranges, appeal to shoppers more than others do. For example, suppose there were two iPhones, one priced at $599 and the other at $600. Based on the first number, the first iPhone seems cheaper and thus more appealing despite the fact that essentially, it’s only a cent cheaper.
However, the benefit of it looking cheaper may even harm the item because the quality of it may be perceived as lower than it actually is. Additionally, these are not the easiest numbers for buyers to add up when going on large shopping trips, which makes the shopping trip itself, not the most pleasant.
Bundling encompasses gathering several items or service together into a bundle and then evaluating the entire group at a lower price than you typically would when you sell them on their own. This strategy lets companies make more money by offering customers a discount. It’s especially ideal for when you’re trying to clean out your stock. These bundles are typically filled with items that didn’t do so well. This way, you’ll still make some money off of them instead of them just going to waste. Keep in mind, though, that the loss from the less important items needs to compensate for the ones that are much more important.
It’s not ideal, though, because promotions won’t keep going on. It’s there mostly to get the attention of shoppers. When the price goes back to normal on the important item, you may find yourself losing the customer that you had just gained.
Dynamic Competitive Pricing
Unlike static prices, which stay the same regardless of the situation, dynamic prices are those that are flexible, meaning ones that change depending on outside forces.
In fact, let’s take a look at how the prices shifted in 2017 for a plane ticket. These prices from Chicago to Los Angeles were tracked by Fare Detective. This is an example of dynamic pricing, one competitive price strategy that you’ll get to learn more about down below.
When you take a look at it, you can see that the prices were the highest in December because it’s the holiday season. However, seasonality is only one of the many reasons why prices change. A few other reasons include:
- Prices of rivals
- Inventory of rivals
- Future predictions, etc.
By knowing this information and calculating the price elasticity for each period you may dynamically vary prices.
- With a decrease in prices, you can increase the sale of items that aren’t doing so well so that you can still meet the goals you had put in place.
- If, for instance, a competitor has set a price much higher than your own, then you can increase yours to make more profit, while remaining highly competitive.
- According to Forrester Research, dynamic strategy increases profit by 25% and it also enhances gross margins by 10%.
- Shoppers may walk away from brands that change their prices too often
- There’s a possibility of a price war occurring
- Tracking all of the price changes and making sure that the data obtained is useful
Just as with anything, these retail methods come with their pros and cons. However, if implemented properly and into the right company, they can make a world of a difference. With a loss leader, you can bring in the customers that you’re trying to gain the attention of while also making sure that you’re making up the loss in price with other items.
Psychological pricing is a smart and easy way to get customers to make a purchase, granted you understand your customer base well.
Dynamic strategy is especially prevalent in today’s, online and offline sales environments and with the right systems, a retailer can solve any of the problems initially associated with it. For instance, Competera sets pricing rules to make sure that the prices correspond with their identity and it also sets floor prices to ensure that prices don’t go below a certain point, just to name a few.
However, don’t limit yourself to these just three competitive strategies. There are so many others out there that you can combine with these ones in order to make the most out of your business, no matter a leader or a follower you are for now.