The Power and Disadvantages of Competitive Pricing: A Guide for Young Entrepreneurs

Imagine you and your friends all set up lemonade stands on the same street. You all want to sell as much lemonade as possible, but customers can only buy from one stand at a time. Understanding the importance of disadvantages of competitive pricing is crucial.

Fewer people might buy from you if your lemonade costs more than your friends’ lemonade. If it’s too cheap, you might not make enough money to cover the cost of lemons and sugar.

How do you decide on the best price? This is where a competitive pricing strategy comes in!

A competitive pricing model is key to your business success. The right price can bring new customers, drive revenue, and help a business grow, while the wrong price can drive potential buyers away or even lead to financial losses.

Pricing strategies vary across industries, but competition-based pricing strategy is one of the most commonly used approaches, particularly in highly competitive markets where multiple businesses offer similar products or services.

Understanding pricing is not just about numbers; it’s about marketing strategy. Businesses must consider factors like customer expectations, perceived value, market positioning, and gross profit when determining the best pricing approach.

It is essential to find a balance between profitability and competitiveness—setting a price too high might push customers away while setting it too low might not cover production costs or might create an image of low quality.

In this guide, we will explore how businesses set prices based on what their competitors are charging. We’ll look at various pricing strategy advantages and disadvantages, real-life competitive pricing examples, and how to use market research to develop a winning pricing strategy.

By the end, you will have a deeper understanding of how competitive pricing works and whether it’s the right strategy for your business.

Understanding Disadvantages of Competitive Pricing

Competitive pricing is a pricing strategy where businesses set the price of their products or services by looking at what others in the same market are charging. Instead of just thinking about production costs or the profit they want, companies analyse the competitive marketplace to make pricing decisions.

This ensures they can bring new customers, remain viable in the market, and sustain profitability while responding to industry trends through a competition based pricing strategy.

Businesses use competitive pricing to position themselves strategically within the market. They compare their price points to their direct competitors and adjust accordingly to create a competitive edge.

This approach is often referred to as competition-based pricing or competitor-based pricing strategy. The goal is to maintain market positioning by aligning with or undercutting competitors’ prices.

Why Do Businesses Use Competitive Pricing?

There are several reasons why businesses use this approach:

• To remain competitive: In a highly competitive market, companies must stay in line with competitors to ensure they don’t lose customers.
• To attract more customers: Customers often compare prices before making a purchase. A competitive price can encourage them to choose one business over another.
• To generate more business: If a company offers a lower price than its competitors, it can encourage more people to buy its products or services.
• To gain market share: Businesses entering a new market often set smaller prices to win customers from competitors.
• To match customer expectations: If prices are too high or too low compared to competitors, customers may question the quality of the product or service.

Understanding competitive pricing advantages can help businesses align their pricing with customer expectations and improve profitability.

Types of Competitive Pricing Strategies

There are three main pricing strategies used across the business landscape:

A competitive pricing model focuses on analyzing competitor prices and consumer demand externally, rather than on internal production costs, to optimize pricing decisions and enhance competitiveness in the market.

Pricing Below Competitors

A lower pricing strategy—also known as penetration pricing or discount pricing—involves setting prices below competitors to attract customers, boost sales, and gain market share. Often used when a company is new and wants to build a customer base quickly. While this approach can work in highly saturated markets, it comes with several risks that businesses must carefully manage. Competitive pricing examples can illustrate how businesses align their prices with those of rivals to attract customers and enhance market positioning.

Pricing below competition strategy works by:

• Setting Prices Below Competitors: Businesses analyze competitors’ pricing and set more affordable price points to recruit new customers.
• Reducing Costs to Maintain Profitability: Companies focus on lowering production costs, improving supply chains, and operating efficiently to maintain profits despite reduced prices.
• Achieving High Sales Volume: The goal is to sell in bulk, making up for lower margins by selling more products.
• Targeting Price-Sensitive Customers: Businesses cater to customers who prioritize affordability over brand loyalty or premium features.
• Offering Discounts & Promotions: Regular sales, bundle deals, and special offers help businesses stay competitive.

Examples of pricing below competition strategy in action:

Aldi (Everyday Low Pricing – EDLP)

Aldi maintains low prices year-round instead of offering periodic sales. This strategy attracts budget-conscious customers and ensures a steady flow of sales.

Ryanair & Budget Airlines

Low-cost airlines like Ryanair and Spirit offer cheap tickets with no-frills services, making air travel affordable while generating revenue through extra fees for luggage, food, and priority boarding.

Amazon’s Competitive Pricing

Amazon frequently lowers its product prices to undercut competitors, leveraging its vast logistics network and economies of scale to stay profitable despite thin margins.

Types of Lower Pricing Strategies

Penetration Pricing

• Businesses set extremely low prices when entering a market to get new customers, a strategy known as competitive based pricing.
• Once the brand is established, they gradually raise prices.
• Example: Streaming services like Disney+ launched at low prices to compete with Netflix, later increasing subscription rates.

Loss Leader Pricing

• Companies sell certain products at a loss to drive traffic to their store.
• The goal is to encourage customers to buy other, more profitable items.
• Example: Supermarkets selling cheap milk or bread to bring customers in, hoping they buy higher-margin items like snacks and drinks.

Everyday Low Pricing (EDLP)

• Prices remain consistently low without frequent sales or discounts.
• This builds customer trust and reduces the need to wait for promotions.
• Example: Walmart’s EDLP model ensures low prices all year round.

Discount Pricing

• Businesses frequently offer discounts, promotions, and flash sales to attract customers.
• Example: Fashion retailers like H&M and Zara use seasonal discounts to move inventory.

Economy Pricing

• Used by budget brands that strip away non-essential features to sell at smaller prices.
• Example: Generic supermarket brands offer cheaper versions of branded products.

Advantages of pricing below competition

Attracts More Customers – Low prices draw in budget-conscious buyers, increasing sales.

✔ Increases Market Share – Competitive pricing helps businesses capture a larger audience quickly.

✔ Encourages Bulk Purchases – Customers are more likely to buy multiple items when prices are low.

✔ Creates Competitive Advantage – Offering cutting prices can force competitors to rethink their pricing models.

✔ Builds Brand Awareness – New businesses can gain visibility by undercutting competitors.

✔ Generates High Sales Volume – Lower margins are balanced by selling more products.

✔ Appeals to Price-Sensitive Markets – In industries where price is the main factor, this strategy is essential.

Pitfalls of Lower Pricing Strategy

1. Smaller Profits

• Smaller prices mean lower profit, making it harder to cover production costs, marketing, and operational expenses.
• Companies need to sell high volumes to maintain profitability, which may not always be sustainable.
• Example: If a restaurant lowers prices but cannot attract enough customers, it may struggle to pay for ingredients, staff wages, and rent.

2. Customer Perception of Low Quality

• Many customers associate low prices with inferior quality.
• If a business lowers prices too much, customers may assume the product or service is cheaply made or unreliable.
• Example: A clothing brand that drastically lowers prices may be perceived as using low-quality fabrics or unethical labor practices.

3. Difficulty in Raising Prices Later

• Once customers get used to low prices, they may resist future price increases.
• If a company eventually raises prices to improve profit margins, customers may switch to competitors.
• Example: A software company that starts with a cheap subscription plan may struggle to retain customers if it later raises fees.

4. Increased Price Sensitivity Among Customers

• People with less money tend to chase the lowest price, meaning they may switch to competitors as soon as a better deal appears.
• These customers lack brand loyalty, making it hard for businesses to build long-term relationships.
• Example: Shoppers who always buy based on discounts and promotions are unlikely to stay loyal to a single store or brand.

5. Risk of Starting a Price War

• If competitors respond by lowering their prices as well, a price war may begin.
• This can lead to unsustainable pricing, where multiple businesses suffer from shrinking profits.
• Example: Airlines frequently lower ticket prices to match competitors, often leading to unsustainable fares that make profitability difficult.

6. Difficulty in Covering Business Costs

• Businesses that rely on reducing prices often struggle to afford essential expenses like:
• Marketing campaigns
• Product improvements
• Customer service enhancements
• If a company cannot invest in growth, it may lose relevance in the competitive landscape.

7. Customers Expect Constant Discounts

• If a business frequently lowers prices through sales, discounts, or special offers, customers may refuse to pay full price.
• Many customers wait for discounts, delaying purchases and affecting the company’s cash flow.
• Example: If an online store regularly runs flash sales, customers may only buy products when they are on sale.

8. Devaluation of the Brand

• A reduced price strategy can harm brand reputation, making it difficult for businesses to compete on value instead of price.
• Premium or luxury brands rarely offer sales because it can hurt their exclusivity.
• Example: If a high-end watch brand suddenly lowers its prices, it may lose its prestige and status appeal.

9. Unsustainable for Long-Term Growth

• Businesses need healthy profit margins to reinvest in product development, employee salaries, and business expansion.
• Constantly lowering prices without a long-term strategy can limit growth opportunities.
• Example: Many small businesses that compete on price alone struggle to scale because they lack funds for expansion.

10. Attracting the Wrong Customer Base

• A lower pricing strategy often attracts budget-conscious shoppers who may not be the ideal long-term customers.
• Businesses that want to build a strong customer base should focus on value and differentiation, not just price.
• Example: If a service-based business offers cheap rates, it may attract customers who expect a lot for little money, leading to unrealistic demands.

Pricing at the Same Level as Competitors (Same Price Strategy or Dynamic Pricing)

Dynamic pricing is a pricing strategy where businesses adjust their prices in real-time based on factors such as market demand, competitor prices, customer behaviour, time of day, and supply levels. This approach allows companies to maximize profit margins by offering different prices to different customers or at different times. However, a pricing strategy based solely on competitors can hinder a brand’s ability to differentiate itself and may lead to missed opportunities for profit and revenue growth.

Dynamic pricing is widely used in industries where prices fluctuate based on demand, such as airlines, hotels, ride-sharing, e-commerce, and entertainment.

A Dynamic Pricing strategy works by:

1. Monitoring Market Trends – Businesses track real-time market data, such as demand, customer interest, and competitor pricing.
2. Analyzing Customer Behavior – Pricing systems analyze browsing history, location, and previous purchases to determine optimal prices.
3. Adjusting Prices Automatically – Prices increase or decrease based on demand, time of day, or competitor movements.
4. Testing and Optimization – Businesses test different pricing strategies and refine them to maximize revenue and customer retention.

Examples of Dynamic Pricing in Action

Airlines and Hotels

• Flight and hotel prices change constantly based on seat availability, season, and demand.
• Example: A flight ticket might cost $200 today but rise to $350 tomorrow as seats sell out.

E-Commerce (Amazon, eBay)

• Online retailers adjust prices based on competitor pricing, shopping behaviour, and inventory levels.
• Example: Amazon might drop the price of a smartphone if a competitor offers a reduced price.

Entertainment and Events

• Concerts, sports events, and movie theatres adjust ticket prices based on seat availability and demand.
• Example: Broadway show tickets cost more during peak season and less during the off-season.

Retail and Grocery Stores

• Supermarkets and retailers use electronic price tags to adjust pricing dynamically throughout the day.
• Example: A grocery store may lower the price of fresh produce near closing time to reduce waste.

Types of Dynamic Pricing

1. Time-Based Pricing – Prices change depending on the time of day, week, or season.

• Example: Hotels and airlines increase prices during peak travel seasons.

2. Demand-Based Pricing – Prices go up when demand is high and drop when demand is low.

• Example: Uber’s surge pricing during rush hour.

3. Segmented Pricing – Different customers pay different prices based on location, browsing behaviour, or customer loyalty.

• Example: Online stores showing different prices for the same product in different countries.

4. Competitor-Based Pricing – Prices fluctuate in response to competitors’ pricing strategies.

• Example: Amazon adjusting product prices based on Walmart’s pricing changes.

5. Inventory-Based Pricing – Prices rise when stock is low and drop when supply is high.

• Example: Concert tickets becoming more expensive as seats sell out.

Advantages of Dynamic Pricing

✔ Maximizes Revenue – Businesses can charge higher prices when demand is strong. ✔ Encourages Faster Sales – Lowering prices during slow periods increases sales. ✔ Improves Competitiveness – Businesses can react quickly to competitor pricing changes. ✔ Increases Market Efficiency – AI-powered pricing models ensure optimized pricing based on real-time data.

Pitfalls of Dynamic Pricing Strategy:

1. Customer Distrust and Frustration

• When customers notice frequent price changes, they may feel misled or frustrated.
• A product that costs one price today but is more expensive tomorrow can create a negative shopping experience.
• Customers may lose trust in a brand if they believe pricing is unfair or unpredictable.

2. Increased Complexity and Management Costs

• Constantly adjusting prices requires advanced software and analytics, which can be expensive to implement.
• Businesses need real-time data and AI-driven tools to track demand, competitors, and customer behaviour.
• Human oversight is still required to ensure the pricing algorithm is not making extreme or illogical changes.

3. Potential for Price Wars

• If competitors also use dynamic pricing, constant price adjustments can lead to a race to the bottom.
• Companies may end up lowering prices too much, reducing profit margins and devaluing products.
• In industries like airlines or ride-sharing, this can create unsustainable pricing battles.

4. Legal and Ethical Concerns

• Price discrimination—charging different customers different prices for the same product—can lead to ethical concerns.
• Some customers may feel that pricing is unfair, especially if they are charged more based on their location, browsing history, or perceived purchasing power.
• Regulatory authorities in some countries monitor dynamic pricing for potential unfair business practices.

5. Loss of Customer Loyalty

• Customers who notice frequent price changes may delay purchases, waiting for prices to drop again.
• Shoppers may turn to competitors with stable pricing to avoid the stress of unpredictable price hikes.
• Businesses may struggle to build a loyal customer base if buyers constantly feel they are overpaying.

6. Risk of Algorithmic Errors

• If not properly managed, pricing algorithms may make extreme pricing changes.
• Some companies have accidentally set prices too low or too high, leading to lost revenue or public backlash.
• Example: In 2013, an Amazon pricing algorithm glitch led to products being sold for as low as $0.01, causing massive losses for third-party sellers.

7. Not Suitable for All Industries

• Luxury brands and businesses that rely on a higher pricing strategy may lose brand value if they frequently change their prices.
• Customers in industries like healthcare or education expect stable pricing, making dynamic pricing a poor fit.
• B2B companies with long-term contracts often avoid dynamic pricing to maintain strong business relationships.

Pricing Above Competitors

A Higher Price Strategy, also known as premium pricing, is a pricing approach where businesses set prices above competitors to position their products or services as high-value, luxurious, or exclusive. This strategy relies on the perception that higher-priced products are superior in quality, innovation, or prestige. Price intelligence is crucial in this strategy to avoid underpricing or overpricing, which can harm profit margins and market sustainability.

A Higher Pricing strategy works by:

1. Creating a Strong Brand Image – Businesses invest in branding, advertising, and packaging to enhance perceived value.
2. Offering Premium Quality or Unique Features – High-priced products often come with better craftsmanship, innovation, or exclusivity.
3. Targeting a Specific Market Segment – This strategy appeals to affluent customers, professionals, or enthusiasts willing to pay for premium products.
4. Using Scarcity & Exclusivity – Limited editions, personalized services, and exclusive access justify higher prices.
5. Justifying Price with Superior Customer Experience – Many high-end brands offer concierge services, warranties, or VIP treatment to create additional value.
6. Maintaining Prestige & Price Consistency – Unlike discount brands, premium brands rarely cut prices to protect their brand perception.

How to Set a Competitive Price

Setting a competitive price involves several steps:

1. Conduct market research: Gather data on the prices of your direct competitors, including their pricing strategies and tactics.
2. Analyze customer demand: Understand the demand for your product or service and how it relates to the prices of your competitors.
3. Calculate production costs: Determine the costs of producing your product or service, including labor, materials, and overhead.
4. Determine your pricing objective: Decide whether you want to set prices above, below, or the same as your competitors.
5. Set a competitive price: Based on your research and analysis, set a price that is competitive with your competitors and profitable for your business.

Advantages of a Competitive Pricing Strategy

A competitive pricing strategy has several advantages, including:

1. Increased sales: By setting prices that are competitive with your competitors, you can attract more customers and increase sales.
2. Improved brand loyalty: When customers feel that they are getting a good deal, they are more likely to become loyal to your brand.
3. Enhanced customer satisfaction: Competitive pricing can lead to higher customer satisfaction, as customers feel that they are getting value for their money.
4. Increased market share: By setting prices that are competitive with your competitors, you can gain market share and increase your business’s visibility.

Common Mistakes in Competitive Pricing

There are several common mistakes that businesses make when it comes to competitive pricing, including:

1. Not conducting thorough market research: Failing to gather accurate data on competitor prices and customer demand can lead to pricing mistakes.
2. Not considering production costs: Failing to calculate production costs can lead to pricing that is not profitable.
3. Not setting clear pricing objectives: Failing to determine your pricing objective can lead to confusion and inconsistent pricing.
4. Not monitoring competitor prices: Failing to monitor competitor prices can lead to pricing that is no longer competitive.

By avoiding these common mistakes and following the steps outlined above, businesses can set competitive prices that attract customers and drive sales.

Recommended Books for Young Entrepreneurs

To learn more about business and pricing strategies, check out these books:

1. “The Lemonade War” by Jacqueline Davies
   • A fun story about kids using business strategies to sell lemonade.
2. “Kidpreneurs: Young Entrepreneurs with Big Ideas!” by Adam Toren and Matthew Toren
   • A beginner-friendly book that introduces business concepts to young minds.