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Competitive pricing is the use of wholesale pricing strategies based on one's competitors. This method of wholesale pricing is based on the belief that competitors have already optimized their pricing strategy based on current market conditions. This method of pricing is frequently used by businesses selling the exact same, or similar, products and services within a particular market.
Competitive pricing is common when a product has been on the market for a length of time, and where substitutes for the product are readily available. In order to remain competitive when using competitive pricing strategies, companies usually need to gain market share by delivering exceptional customer service and quality, which can vary from business to business.
There are three fundamental approaches to competitive pricing: loss leader, price matching and premium matching. Determining the best approach to use requires careful consideration of brand image, sales targets and opportunities in the marketplace.
Loss leader pricing is a pricing strategy that's popular with consumers because it means wholesalers and retailers are selling products below cost, at a loss.
Loss leader pricing is used to entice buyers — think Black Friday sales — in the hopes that the shoppers will opt to purchase other, full-priced items at the same time. While this approach can be successful in brick-and-mortar shops such as grocery stores and electronics retailers, loss leader pricing in the e-commerce space can attract 'cherry pickers' — customers who only purchase the loss leaders and leave the site without buying any of the full-priced items.
Loss leader pricing can be profitable with items that require repeat purchases, such as soap dispensers that only work with a particular refill pack. The dispenser might be sold at a loss in order to generate recurring demand for the refills, creating an ongoing revenue stream for the seller.
In hyper-competitive markets saturated with the same, or very similar products, price matching is a strategy used to attract and retain customers. Wholesalers and retailers agree to match prices set by a competitor upon receiving proof that a product is available at a lower price through another store or supplier. To qualify for price matching, consumers usually need to show the competitor's ad for the exact same item, and the consumer may also need to prove the lower-priced item is in stock at the other store or supplier.
Price matching is widely used by national and international box stores as a way to attract and retain customers. Hardware stores, grocery stores and department stores frequently price match in-store products, even if the product in question is only cheaper for a short period of time due to a sale or special promotion.
Some retailers will even price match retroactively for a limited time after purchase. This is often referred to as price adjustment. The buyer receives a refund equal to the difference between what they paid and the current sale price. For example, Lowe's will even provide a price adjustment on items offered at a lower price by a competitor within 30 days of the purchase date.
Premium matching is another wholesale pricing strategy that focuses on service, rather than products. Wholesalers and retailers who use this strategy aim to match premium services such as free shipping, generous return and exchange policies, and extended warranties as a way to remain competitive in a crowded marketplace.
Other premium matching techniques involve selling a similar product that is differentiated from the competition in a way that makes consumers feel like the higher price is worth it. A well-known example of premium matching is Apple, which employs this strategy through extensive branding and exclusive products. Despite the fact that Apple computers are comparable to many other brands offered at a fraction of the cost, Apple has been successful in promoting its brand as being unique, innovative and worth a premium price.
While competitive pricing is one of the simplest and most reliable wholesale pricing strategies, it has a number of pros and cons.
The main advantage of using competitive pricing is that it relies on established sales patterns garnered over a period of time. When selling a product that's identical, or comparable, to other products that have been available for a number of months or years, the initial price fluctuations have been worked out.
Whatever the competition is selling the product for is what the market will currently bear. This eliminates the trial-and-error period that many sellers go through when launching a new product, allowing the seller to launch their product at an opening price that is already proven to be acceptable to consumers.
Another pro of competitive pricing is that it's widely accepted by consumers. Shoppers have come to expect that an item will be offered at the same price by a variety of sellers, and in fact, pricing a product below what the competition uses can raise suspicions about the legitimacy of a product.
One of the biggest risks of using this wholesale pricing strategy is that it may be perceived as price-fixing, a practice that is against the law in many jurisdictions. Simply deciding to set prices that match your competition without backing up that decision with some market research can give the appearance of price-fixing, and that can be a costly mistake.
Another con of competitive pricing is that it can be impossible for small sellers to achieve profitability when going up against big retailers. Small businesses simply don't have the buying power that multinational chains do, and trying to compete on price can be impossible for small and medium-sized companies.
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