Effective pricing can make or break a business. Selling a well-established product at a similar price to competitors is an option for small retailers who want to draw customers to their businesses. Keeping customers there, however, often means distinguishing themselves on bases other than price. Relying on a competitive pricing strategy may be risky if volume cannot be maintained or if costs suddenly rise.
Pricing Strategy Options
Competitive pricing is one of four major pricing strategies. Other options include cost-plus pricing, where a set profit margin is added to the total cost of a product – including materials, labor and overhead.
Markup pricing is where a percentage is added to the wholesale cost of a product. Demand pricing is determined by establishing the optimal relationship between profit and volume; a smaller per-unit profit is acceptable if volume is increased significantly. Competitive pricing is charging a price that is comparable to other vendors selling the same item.
Factors to Consider
Product prices determine the revenue stream of a business. Prices must be sufficient to cover the costs of product production, company overhead and profit. Before lowering prices it’s preferable to lower costs to maintain a stable profit margin and a stable cash flow into the business. Any pricing strategy must be chosen to ensure a maximum of profit. Knowing your market and customer base are key elements to choosing the right pricing strategy.
About Competitive Pricing
Vendors use a competitive pricing strategy when several other businesses sell the same product and there is little to distinguish one vendor from another. A market leader will generally set the price for the product and other vendors will usually have no option but to follow suit in order to remain competitive. Vendors will either match the pricing of the market leader or set prices within a comparable range.
Establishing Competitive Pricing
Vendors who are not market leaders can use the accepted price as a starting point. From there they can opt to charge slightly more on the basis of factors such as superior customer service or an extended warranty on a product. Retailers must be fully informed of the prices their competitors charge and also know how discerning their customers are on price alone. Once price is established, sales volume must be monitored to see if the strategy is working.
Risks of Competitive Pricing
For many small businesses in particular, competitive pricing results in a narrowing of profit margins. This makes the business vulnerable to a sudden rise in costs. Therefore, independent retailers competing with high-volume, big box stores may choose an alternative pricing strategy that affords them a larger cushion on their profit margin and justify it on the basis of their niche advantage – for example, being local and customer-focused.