The Impact of Competition on Pricing Strategy
No product exists as an island unto itself, especially in the area of pricing. Competitors' pricing within a category has direct impact on each other's pricing. Pricing wars, price-matching and undercutting are all tactics that a competitor might employ to get an advantage or upset the competition's strategy.
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Industry Pricing
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Product pricing must conform to industry and category levels. However, depending on quality, features and benefits, and even a unique selling proposition manufactured through advertising, a product can price itself at the higher range of category pricing.
The airline industry used pricing and air routes as key tools in its competitive strategic arsenal before online ticketing companies such as Expedia and Priceline helped to homogenize airline pricing with seat availability data. JetBlue once had a huge price marketing success by offering passengers one-month passes for any flights for only $599. This was essentially a pricing strategy.
Price Wars
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Pricing wars are most often played out at the local level. Auto dealers, furniture stores and grocery store competitors often engage in pricing wars within their business sector. Advertising will informally or formally declare that they'll "match a competitor's pricing".
This action might spark a price war that could ultimately only benefit the consumer. Competitive show-downs with dueling prices are short-lived tactics as they affect profits rather than growth.
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Consumer Demand
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Consumer demand can influence competitors pricing. When demand is high, prices are raised and all businesses benefit. This is the ideal macro pricing situation for a business, whatever the industry. Competitors in such a situation can relax and concentrate on other aspects of marketing programs.
When demand is low, pricing levels fall to attract buyers. Competition heats up for the smaller available demand and pricing tactics get pulled out of the marketing toolbox.
Price Matching
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Matching a competitive price is a tactic used by marketers to take the issue of price off the table. This tactic is used by a company that may be stronger competitively on other features and benefits. Price matching puts a competitor on the defensive.
The gasoline industry sets price based on the price of crude oil. Gas stations, though, primarily engage in price matching and price wars with local competitors.
Price Undercutting
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A business that undercuts prices often does so from a difficult position against a strong competitor. It may be the only way to compete is to lose money on the price, but make up for it on the volume sold.
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