Price competition is a strategy that implies reducing prices to compete with rivals. The technique is popular among the sellers of the same products since they have similar features, yet the price points can differ.
In this article, we’ll review the advantages, disadvantages, and types of price competition. We’ll also compare price and non-price competition.
Advantages and Disadvantages of Price Competition
Price competition carries advantages and disadvantages for those who want to incorporate it. In this section, we’ll review them all, so you know what to expect once you use these methods. Let’s start with the benefits.
A price drop is highly beneficial for consumers. They can search for the necessary product, and if the price is too high, they can buy from competitors. For example, consumers who want to buy tomatoes can consider different sellers. The product is the same everywhere, so they pay attention to the price. If one store offers a pound of tomatoes for $4 while the other for $3, customers will choose based on the cost.
Companies also benefit when they implement the technique. Lower prices often attract more consumers. As a result, brands succeed to sell more goods and get more revenue. Although the profit margin reduces, selling a lot rather than having zero sales is better. The strategy is especially useful for new businesses that have just entered the market. Competitive prices allow them to shape their customer base and survive in an increasingly competitive market.
The approach also has drawbacks. Products with a low cost obviously have low quality. That’s why customers might face problems with them. Entrepreneurs also experience the cons for their businesses. Since they reduce the price of the products, the profit margins decrease. As a result, they receive lower revenues.
Now that you know the pros and cons, let’s jump into the next section to unveil the difference between price and non-price competition. It will help you identify the most suitable strategy for your product and business.
Price vs Non-Price Competition
Sometimes people confuse the terms yet the difference is obvious. We’ll review the peculiarities of each strategy so that you can consider it for your business.
Price competition is a strategy that implies companies offering products with the same features and reducing prices to win consumers. Since their products don’t have any differentiators like high quality, unique selling proposition, good location, or exceptional after-sales service, they compete by providing lower prices.
Non-price competition is a strategy that involves brands relying on non-price differentiators like high quality, amazing features, excellent customer service, and other perks. Businesses don’t reduce prices on their products to stay competitive. Moreover, their prices are often higher than competitors’ because they have higher expenses to produce an amazing product in terms of quality, features, and service.
Simply put, in price competition, products are complete substitutes, so companies stay competitive only if the price is lower, while in non-price competition, brands stand out because of quality, unique selling proposition, competitive advantage, great customer service, etc.
Now that the difference is clear, it’s time to review the types. After reading this section, you’ll be able to choose the methods that fit your company.
Types of Price Competition
We can differentiate 4 types of price competition. Let’s unveil each of them so that you can make a choice.
- Penetration pricing. It’s offering a product or service at a low price so that consumers instantly notice it. The strategy is a great fit for brands that just entered the market. They can provide consumers with lower prices to attract competitors’ consumers and build a customer base. For instance, if you just opened a florist store, pay attention to your competitors’ prices and make your prices lower.
- Freebies. Free products often capture customers’ attention. Consider using this technique. To stand out among competitors and attract more consumers, offer a free product, discount, or free delivery. It’ll allow you to win more sales. Customers will also be satisfied with their purchases.
- Premium pricing. Premium products differ from others by being superior to competitors’ offerings. People concerned with quality, branding, and luxury will purposely choose high-priced products. Brands with expensive items differentiate themselves from others by being premium. Rolex is the ultimate luxury watch brand. The company offers a great variety of expensive products, and only rich people can afford to buy them. Having a Rolex watch indicates the status of the owner.
- Loss leader. A company sells its product for a price lower than the production cost to attract consumers and sell complementary products. The approach will come in handy for business owners entering the market or those who want to increase their market share. Examples of popular sales include Black Friday, Cyber Monday, Christmas sales, etc. Brands create ads to inform consumers about upcoming sales and discounts that sometimes reach 70%. They provide people with attractive prices to sell old inventory.
Congrats, now you know what price competition is and why it’s essential. Hope that you’ll succeed in implementing different types of this strategy.
Last Updated: 22.07.2022