A competitive pricing strategy focuses on matching your price with your competitors based on the assumption that the market has already defined the right price for a product. By setting the same price as your competitors, a newly-launched firm can avoid the trial and error costs of finding the right price. When products are identical or highly similar, it is often easier to copy competitors’ prices rather than implementing another pricing strategy. This way, the cost of finding the optimum price has been left with the competitors.
The main drawback with the competitive pricing method is that it fails to account for differences in products and costs between companies and therefore be inefficient by leading to reduced profits. If the products are only somewhat similar, the price is hardly transferable. According to classical economics, two products are congruent if a consumer can replace a quantity of one product by a quantity of another product without experiencing any loss in product utility. In reality, it can be quite difficult for a retailer to define congruence when comparing its products with those of its competitors. Are the different brands of smartphones congruent?
When defining a pricing strategy, one must define the competitors carefully, analyze congruency between competing products, and keep in mind that price, in itself, is a signal about a product’s quality.
Learn more in the entry Competitive pricing of the Lokad knowledgebase.