Competitive Pricing Strategies

Competitive Pricing, Bundling Pricing and Psychological Pricing

• The importance of integrating pricing decisions in business for profitability is discussed
• Chapter defines bundle pricing, reviews types, usage, advantages and disadvantages

Objectives

• Students should be able to create pricing strategies for maximum value
• Students should understand how pricing impacts revenue and profitability
• Students should be able to use pricing analytics techniques

Competitive Pricing Strategy

• An effective strategy helps a business set competitive offer prices and maximize revenue
• Businesses can choose from various strategies based on different factors
• Maximizing profitability per unit or overall market share is possible
• Pricing can deter market entry, increase market share, or maintain market position
• Pricing is a critical component of marketing and influences consumer purchase decisions
• Competition is more aggressive and real-time due to e-commerce/digital commerce

E-Commerce

• Businesses must monitor competitors' pricing for a competitive edge
• Price comparison is easy online, and customers know product monetary values
• Cost, competition, and price sensitivity are factors in setting prices
• Firms must set prices to cover costs, overhead, and deliver profits for sustained profitability
• Some avoid pricing models in favor of competitive pricing

What is Competitive Pricing?

• Competitive pricing is where businesses set prices based on competitors
• Also known as competitor-based pricing
• Used online and offline to attract customers and increase market share
• Businesses must know competitors' pricing strategies and consumer value perception
• It considers competitor prices when setting product prices
• Used for homogeneous products in competitive markets and is market-oriented pricing

Setting Prices

• Research to understand what similar businesses charge
• Consider costs of materials, labor, overhead, and shipping
• Understand target market and customer willingness to pay
• Monitor market and industry trends and economic changes that could impact expenses, customer demand and costs

Competitor-Based Pricing Options

• Pricing Options
  • Above competitors
  • Following competitors
  • Below competitors

Advantages of Competition-Based Pricing

• Easy to implement by analyzing market prices, not complex calculations
• No need for extensive market research
• Straightforward approach to staying competitive
• Low Risk
  • Reduces overpricing or underpricing
  • Attracts customers with competitive prices
  • New businesses gain market entry without trial-and-error
• Competitive pricing can combine with value-based pricing or discounts
• Businesses adjust pricing dynamically to maintain balance between competitiveness, profitability and remain relevant in the market

Disadvantages of Competition-Based Pricing

• Focusing only on price can cause businesses to ignore differentiation and unique value
• May miss opportunities based on quality, branding, or innovation
• Some customers pay more for better service or unique offerings
• Businesses fail to stand out in the market without differentiation, which can lead to a lack of brand loyalty
• Companies relying on price matching risk being overlooked
• Can lead to price wars, which can reduce profit margins
• Smaller businesses may struggle to compete with larger competitors

How is Competitor-Based Pricing Calculated?

• Direct Competition occurs when businesses offer identical products/services at comparable prices and target the same customers
• Indirect Competition involves businesses offer alternative solutions which fulfill a similar need

Bundling Pricing Strategy

• Businesses increase customer satisfaction and profit margins
• Flat price to attract consumers
• Understanding it can help when implementation

Bundle Pricing

• Grouping several products together and sell them at a single price
• Packaging separate products together, offering them at a typically reduced price

Types of Bundling Pricing

• Pure bundling
  • Customers can buy the bundle as-is or not at all
  • Easiest way to bundle because the products / services in the bundle are under company control
• Mixed bundling
  • Customers have the option of purchasing each product / service individually (at a higher price) or together
  • Provides options and could be considered better to consumers

Bundle Pricing Usage

• When to Use
  • Unsold Stock
  • New Product

Advantages of Bundle Pricing

• Increase revenue
• Test new product
• Improve customer experience

Disadvantages of Bundle Pricing

• Customers may not need all the products
• Decrease in revenue due to discount
• Customers may have negative view if product is outdated

Who Uses Bundle Pricing

• Businesses increase value, customer satisfaction
• Restaurants bundle food items that complement like fast food meals
• Internet and cable companies offer options for channel preferences
• Retail stores bundle popular/higher-priced items with lower-value items like cameras with accessories

Psychological Pricing Strategy

• Psychological pricing is using psychology to push consumers to spend
• Joint effort of pricing, marketing, and sales to build an attractive offer
• Used to influence consumer behavior for a long time

Importance of Psychological Pricing

• They're important and foundational to pricing, marketing, and sales

Psychological Pricing Practice

• Practice of setting prices slightly lower than a whole number
• Based on the belief that customers do not round up these prices, and so will treat them as lower prices than they really are
• Customers tend to process a price from the left-most digit to the right, and so will tend to ignore the last few digits of a price particularly if smaller font
• Setting the price of an automobile at $29,999, rather than $30,000 is a common example

Kinds of Psychological Pricing

• Charm pricing and odd-even pricing
• Artificial time constraints
• Innumeracy
• Price Appearance
• Decoy Pricing

Charm Pricing and Odd-Even Pricing

• Removes one cent from rounded dollar price
• Tricks buying process into thinking it costs less
• Turns $4 into $3.99
• Customers see and remember 3, not 4
• Leads consumers to believe they're spending less than what a product is worth

Artificial Time Constraints

• "One day only!"
• "Only a few hours left!"
• "Early bird sale!"
• Creating a sense of urgency
• Events or sales encourage customers to make purchases quickly

Innumeracy

• "Buy one, get one free" option sells better, even though the math is exactly the same
• Customers feel like it's a better deal
• Capitalize on the act that consumers prefer to receive free goods more than discounts

Price Appearance

• Way a price appears can influence the way customers feel about it
• Ditching the cents makes people feel like they're spending less money
• $12 feels cheaper than $12.00 because the number itself isn't as long.

Decoy Pricing

• Business offers basic products or service options to nudge consumers toward a premium option
• Ex: Price lining

Advantage of Psychological Pricing

• Any type of big promotion will boost attention to products
• Simplify the decision-making process for consumers
• Offer a high return on investments for one-time sales.
• Create a sense of urgency.

Disadvantages of Psychological Pricing

• Some people may see right through psychological pricing tactics and perceive it as taking advantage of customers
• Always risk of misperceived value/lower perceive of products
• This low perception continues indefinitely, especially if pricing too low
• Employing psychological pricing tactics is not a long-term pricing solution
• B2B businesses should have a more solid and long-term plan in place
• SaaS businesses are built on recurring revenue, and with that, comes a lot of trust from customers. Utilizing pricing tactics may damage that trust