What most brands get wrong about competitor-based pricing

In the race to stay competitive, many brands use a proven strategy: competitor-based pricing. By closely monitoring market rates and adjusting their own prices, either by matching them or providing better offers, they aim to attract price-sensitive customers, maintain market share, and demonstrate their ability to adapt.

The hard reality is that while such an option sounds safe and sensible, it often fails. And businesses that depend on pricing based on competitors' prices often unknowingly find themselves in a race to the bottom, lowering their margins, losing sight of their value proposition, and losing control over their own pricing.

Let's unpack what most businesses get wrong about competitor-based pricing and how a better customer-focused approach can benefit both their growth and profitability.

Competitor prices don't reflect your value proposition

All brands have their unique value propositions to offer to consumers: product quality, service, convenience, innovation, or emotional attachment.

According to the PwC Global Consumer Insights Survey 2023, 72% of consumers are willing to pay a premium for brands that they trust or perceive as a higher quality offering. Matching your competitor's prices without considering the value they deliver will conflict with the consumer's perceived value, and even potentially undervalue or overvalue your offering.

For example, if your brand is designed around ethical sourcing, producing, and sustainability, pricing yourself like a generic competitor dilutes your profit margin as well as your customers' understanding and perceptions of what makes you different.

You are reacting instead of leading

Competitor-based pricing gives your pricing strategy to your competition. When your choices are based on someone else's actions, you aren't guiding, you're just reacting. This reactive position often leads to instability, constant repricing, and strategic drift.

An analysis of pricing practices by Harvard Business Review found that companies that heavily leaned on competitor-based pricing strategies underperformed by 40% on long-term revenue growth when compared to rival companies. Competitors that leverage data-driven pricing tied to customer segments, demand forecasting, and perceived value tend to win instead.

Some industries and competitors, like airlines and ride-sharing, have become much more dynamic by pricing based on real-time adjustments as their pricing is driven by knowns like demand, customers' behaviour, and historical data instead of only waiting to see what others are doing. This dynamic pricing model allows the competitor to be much more aggressive and lead through strategy and value, and not just follow the herd.

A price war

Competitor-based pricing may lead to fierce price competition. In principle, charging less can get more customers interested. In most cases, it reduces everyone’s income.

According to Bain & Company, too many price cuts due to competition can harm company margins over time, mainly for those unable to keep up with the costs. When prices are lowered, it becomes tough to increase them again without upsetting those who watch pricing closely, driving both buyers and companies into a habit of constant discounts.

Small companies struggle more in this situation since they cannot offer prices as low as larger firms. Going for a quick win by offering lower prices might cause a temporary rise in visitors, but it can harm your business in the long run.

Customer

When your pricing strategy revolves around competitors, you run the risk of forgetting about the one audience that matters most—your customer.

Research by Simon-Kucher & Partners, a global pricing consultancy April 3, 2023, shows that companies that leverage value-based pricing (from willingness to pay) have 25% higher profitability than methods that rely on either cost-based or competitor-based pricing.

Customer-driven pricing means understanding:

• What customers value

• What are the features or experiences they will be willing to pay more for

• How price-sensitive will each segment be?

• Without this data, you are just guessing and often leaving money on the table.

You might be reacting to the wrong signals

Competitor price changes aren’t always as clear-cut as they seem. Their discounts may be part of a limited promotion, part of clearance, or they may be experiencing inventory pressure—it doesn’t necessarily mean they have a new pricing strategy.

If you follow those price decreases without context, you may misalign your pricing strategy. The outcome? Lower revenue without a real competitive advantage.

Today's companies need something more complex than a spreadsheet that displays competitor pricing. Companies need AI-driven pricing intelligence tools, capable not just of tracking competitor behaviour, but also of considering timing, demand, and their internal metrics.

Rethinking the role of competitive benchmarking

Rather than abandoning competitor benchmarking altogether, organizations should think differently about how to use it, as one of the inputs, rather than the driver.

Here's what more insightful pricing looks like:

Value-based pricing: Starts with an understanding of what different customer segments are willing to pay based on their perceived benefits.

Dynamic pricing: Uses AI and historical data to continuously adjust prices, while managing demand with inventory and margin targets.

Hybrid strategies: Incorporate customer perspectives, cost structures, and competitive benchmarks into a flexible pricing framework.

Final takeaway: Price with purpose

In an environment of full price transparency, pricing should not be treated as a race to the bottom; the winners aren't the ones with the lowest price. They're the brands that price with intention, based on customer value, the value of the brand, and strategic thinking.

Competitor pricing should always be part of the decision and not the decision. The brands that know their own value and price in accordance with that value, may not only slow margin erosion, but also create long-term customer loyalty and grow their customer base.

At the end of the day, the best pricing strategy is the one that reflects who you are, not who your competitor is.

Dr. Anshu Jalora ( Founder & MD , Sciative Solutions )