Competitive rates are used by businesses that want to set prices that are based on competitors. This pricing method can be beneficial for those who are entering a new market, as they can use the rates of competitors to determine where their own product fits in the marketplace. However, this pricing methodology doesn’t necessarily optimize a company for growth, and it has some drawbacks that should be considered before using it.
The main issue with competitive pricing is that it can lead to a race to the bottom. A competitor might set its price 10% lower than that of a competitor, which can cause the overall market price to decrease and the profits to fall as well. This can quickly lead to a situation where all competitors are using the same competitive pricing strategy and creating a static market.
Another problem with competitive pricing is that it may lead to predictable sales events, such as month-end or Black Friday sales. This can cause a business to lose revenue when consumers wait for those predictable sales to occur and then buy the product when the price is lowest, causing the company to cannibalize its own profits. This can also lead to the creation of a brand loyalty system, where customers will only buy the products from a particular retailer when they know that the product will be available for less.
When companies are attempting to gain market share or penetrate a new market, they may use aggressive competitive pricing strategies to attract customers. This can lead to a “race to the bottom” amongst the competitors, where each business sets its prices to be below the competition in order to grab a larger share of the market. This can be dangerous for the long term, as it can dilute a brand’s reputation and lead to a price war that ultimately damages sales.
Companies that wish to set their prices above the competition must create an environment that warrants a premium. This can include offering generous payment terms, extra features or other incentives to justify charging more than the competition. The main advantage of this approach is that it can communicate to consumers that the company’s products or services are of high quality and worth the extra cost. It can also help to build customer trust and retention, which are both important for a company’s success. To do this, it is important to understand how competitive pricing works and to determine the best strategy for your own business.