What is Competitive Pricing and How Does it Work?

Pricing is always a tricky line to tread as a business. While some competitors might undercut you, others charge well above your prices, increasing profit margins.

So, where do you stand? This is where competitive pricing can help.

You’re not just setting a number. Instead, you’re setting the tone for selling to a specific market segment while protecting your revenue and profits.

In this guide, we’ll explore the concept of competitive pricing, its types, and how to conduct a competitive pricing analysis yourself.

What is competitive pricing?

Competitive pricing refers to setting the price of your products or services relative to your competitors.

For instance, your competitor might charge $20 per month for a CRM tool while you charge $12 per month. If they offer similar features and have a larger customer base, you could increase your prices slightly to improve your bottom line.

The goal is to stay competitive and cater to customer expectations while increasing revenue and profits. This is why you need to monitor how competitors price their offers continuously. Otherwise, you might get left behind and even lose customers in the long run.

What are the types of competitive pricing?

You can use several competitor pricing strategies to price your offer competitively. Here are a few ways to do that:

1. Price skimming

Price skimming occurs when you set your initial price too high and gradually lower it over time. This technique works exceptionally well when you’re first to market with a specific offer.

You have the right to charge a premium—because not only is it innovative, you have no competitors who can outdo you. So, you capture high profits from early adopters and also tap into a market that’s not price-sensitive.

For example, if you launched a new product using artificial intelligence (AI) in your niche, you could target enterprises with substantial budgets. As you go broader, you could decrease your price and enter new markets—as new entrants come into the picture.

2. Price matching

Price matching happens when you match the pricing or benefits your product offers. It’s beneficial in industries where products or services are standardized.

For example, ChatGPT and Claude, which are direct competitors, price their Pro plans at $20. Even though they offer the same benefits and value proposition, the price remains the same.

That said, you need to be careful when you do this. Continuing down this path without actually considering your business’s health could lead to a race to the bottom.

3. Dynamic pricing

Dynamic pricing, or real-time pricing, is a strategy where prices are adjusted in response to market demands and conditions. This is very common in the e-commerce industry, where the prices for individual products change every day—if not every hour.

Some of the pricing factors include:

• Competitor pricing
• Product popularity
• Purchase history
• Economic shift
• Stock levels
• Seasons
• Trends

This approach can help you increase profits during seasonal trends or if a product is becoming too popular. For instance, you could offer the product at a discounted rate, but you would increase revenue due to high-volume sales.

4. Penetration pricing

Penetration pricing happens when you set a low initial price to quickly gain market share. If you’re launching a new product or service in a competitive space, this could be an easy sell in the beginning. It validates your idea and attracts more customers.

However, you must also ensure your operations and marketing are aligned to attract those customers. This will allow you to keep receiving incoming inquiries and onboard more customers.

5. Premium pricing

Premium pricing involves setting competitive prices that are higher than competitors to create a perception of better quality or exclusivity.

This strategy works well for industries where innovation is a priority, there are not too many players, or you’ve differentiated yourself enough. For example, if you’re selling a manufacturing product that uses a patented technology, you can price higher than competitors.

The key here is to go beyond seeming exclusive and back your offer with proof. You may have raving fans as customers or made the same offer for more than 500 customers. As long as there’s proof, you can use this strategy well.

6. Loss leader pricing

Loss leader pricing is a strategy in which a product or service is offered at a loss (or shallow margin) to attract customers and drive sales for more profitable items.

It’s more commonly used in B2C, but it can also be effective in B2B. For instance, if you’re upselling more premium features, it makes sense to offer a low-ticket product initially.

However, make sure you consider the customer lifetime value (LTV) and the potential for attracting price-sensitive customers. If your pricing goal is to increase retention and upsell, then it could backfire in the long run.

What are the main challenges of competitive pricing?

Competitive pricing can come with its own set of risks, especially if you don’t use it strategically. Here are the most common downsides:

1. Dealing with lower margins

As you keep trying to compete on price, you could reduce margins to win deals. This is a massive risk if you have high operating costs or relatively commoditized products/services.

Over time, your business could suffer due to cash flow issues and high customer churn. Not selling high-volume offers could significantly impact your business’s future viability.

In this case, focus on operational efficiency and cost management. Optimize production processes and cut down on unnecessary expenses. You’ll be able to stay afloat longer and then shift your strategy when you’ve hit your acquisition/revenue goals.

2. Potentially losing money on deals

As you continue to compete with other businesses for the same deals, you might be tempted to reduce the final price constantly. In some cases, it could be below cost or at unsustainable levels, too.

You may upsell them at a later stage, or it’s a short-term contract. Locking yourself into an unprofitable contract could lead to issues in the future. So, account for your total operating costs before creating your pricing.

3. Acting without the right data points

It’s common to face pressure to make quick pricing decisions—especially if you’re in the services sector. You might also copy a competitor’s pricing without any thought.

But this does two things: it leaves money on the table and does not consider your business health. The problem with looking at a competitor’s pricing is that you don’t have an inside look into the decisions that went into it. They may still be testing pricing or catering to a different market segment.

So, use a price tracking tool or analyst that accounts for external factors, such as market trends and economic changes.

4. Triggering a pricing competition

When you lower your prices to gain a competitive edge, your competitors may lower their prices even further. The result? A downward spiral to zero profits.

This is even more problematic for companies with long sales cycles. You spend all that time nurturing a prospect only to attract a price-sensitive customer who churns out in a few months.

So, focus on price but within the context of your business. Show the value you bring to the table in terms of:

• Customer support
• Product types
• Capabilities
• Features

5. Damaging the brand’s reputation

Let’s say you’ve priced at a premium rate in the past. Going public with a lower-priced offer could damage your reputation in the market.

Not just that, pricing is also a matter of credibility and perception. If you price too low, prospects might not be convinced that you’re the right person for the job. On the flip side, if you increase prices for absolutely no reason, that could also get you into trouble.

In addition to pricing, marketing practices also play a role in shaping your brand’s reputation. For example, if you’re not using ethical strategies, such as consent-based marketing, you risk damaging trust with your audience. Pricing and marketing credibility go hand in hand when it comes to attracting the right customers.

Articulate your offer’s value and price it to attract the right customers.

6. Becoming inflexible with pricing

Different customers tend to value other things. If you offer the same price for virtually every deal, you’re in trouble.

That’s one reason most software providers offer custom pricing for enterprise deals. These deals require more customization and nuanced needs, and a simple subscription won’t cover the cost.

Here, competitor pricing might not always be relevant. Build a buffer into your pricing to easily win those high-value deals.

7. Focusing on short-term gains only

Let’s say you priced a contract lower because your team had more availability to onboard clients. But you’re not thinking about it from the perspective of your long-term goals.

You could attract better prospects soon, or you end up setting unrealistic pricing expectations with customers. In both cases, you attract the wrong customers and now can’t take on more customers in the future.

So, if you’re offering a discount or pricing matching, consider the long-term consequences, too.

3 steps to conduct a competitor pricing analysis

Let’s look at how you can find a competitor’s pricing:

Step 1: Finalize your list of competitors

Before you start shopping for a competitor’s pricing, decide who you will benchmark against.

Bucket your competitors into the following categories:

• Direct competitors: Businesses that offer similar products or services to your target market.
• Indirect competitors: Businesses that offer different products or services but solve the same customer problem.
• Potential competitors: Companies that might enter your market space since they work in an adjacent space. This could include successful businesses from related industries or startups with disruptive technologies.

For example, Upwork is a freelance marketplace. Fiverr or Contra would be considered a direct competitor. Freelancers would be considered indirect competitors, and an agency that could build a marketplace would be a potential competitor.

Step 2: Get pricing data from multiple sources

Now, look for pricing data from various sources. It can be challenging as it’s not always publicly advertised—but there are a few places you can find them

Some of them include:

• Web scraping tools (Selenium on ecommerce sites)
• Mystery shopping (demos or sales engagement)
• Social media platforms (LinkedIn, Facebook)
• Customer feedback (third-party review sites)
• Channel partners (distributors and sellers)
• Financial reports (revenue per customer)
• Industry reports (market research firms)
• Direct outreach (request for quotation)
• Former employees (candid outreach)
• Pricing intelligence tools (Unkover) 
• Company websites (pricing page)

For instance, you can use Unkover to monitor a pricing page. So, if any changes are made, you’ll get instant alerts to prompt you to see why that’s the case.Or, if they’re running special promotions with their subscribers, you don’t have to be on their email list to get that data. This type of competitive intelligence prevents manual work and lets you focus on the analysis—not data collection.

Collect data like volume discounts, customization costs, and base price to determine the total cost of ownership.

Step 3: Consolidate the data and determine pricing

Create a spreadsheet with the data. Fill in separate columns for categories like training costs, volume discounts, and customization costs.

Look into how they’re pricing their offer and which pricing models they use. Then, assess the pricing relative to their:

• Customer segment
• Customer size
• Capabilities
• Features
• Market

Use that to build a pricing matrix that assesses competitors based on cost and quality. You can then clearly see which model would better fit your business and price accordingly.

Price strategically to win more customers

Pricing is difficult, especially as markets evolve and customer needs shift. But it’s a critical part of your business, one that decides whether you’ll be truly profitable in the near future.

Another key aspect to remember is that pricing is relative. You can’t ask for premium pricing when your product is not good enough. But if you’re going after large companies, make sure you charge enough to justify the acquisition cost.

It all starts with the right data source. If you want to start monitoring competitor pricing, why not start with a 14-day trial to Unkover?