Competitive pricing: Pros & cons, strategies, examples, and top tools

What is competitive pricing?

Competitive pricing means you set prices relative to competitors (above, at, or below the market) based on real market data. It works best in mature categories with similar products and many substitutes. 

Note: Despite the name, competitive pricing is not mirroring. It is a strategy that weighs market position, buyer expectations, and costs.

Here are common scenarios when businesses use competitive pricing:

• Market entry: New businesses often use lower prices than established competitors to attract initial customers and build a presence.
• Matching competitors: Businesses in mature markets with similar offerings may choose to align their prices with the prevailing market price to remain competitive without initiating price wars.
• Price leadership: Some businesses might strategically price slightly below competitors to be perceived as the most affordable option, driving sales volume.
• Premium pricing (competitive context): Businesses with unique features or strong branding may price slightly above competitors, justifying the higher cost through perceived value.
• Loss leaders: Offering certain products at a significant discount (even at a loss) to draw customers into the store or website, hoping they will purchase other, more profitable items.
• Price matching: Guarantee customers that the business will match a competitor's lower price, which can build trust and prevent customers from shopping elsewhere.
• Penetration pricing: Setting a low initial price for a new product to quickly gain a large market share, with plans to increase prices later.

Note: Understanding the competitive pricing strategy is a key element of broader pricing and packaging strategies, as well as effective product and price management. We encourage you to explore our other blog posts on these interconnected topics for a more holistic view.

Competitive pricing advantages and disadvantages

Here are some pros and cons of competitive pricing.

Pros

1. Attracts customers: Setting prices at or below your competitors can draw in price-sensitive customers, leading to a larger customer base and more sales volume.
2. Grows market share: By offering more appealing prices, businesses can encourage customers to switch from competitors.
3. Easy to implement: Compared to more complex pricing strategies that require in-depth cost analysis or value assessment, competitive pricing is often easier to put into practice.
4. Prevents market share losses: Keeping an eye on and responding to competitor price changes helps businesses strengthen their relevance and stops users from being lured away solely by lower prices offered elsewhere.
5. Can boost profits through volume: A well-executed competitive pricing strategy can lead to a notable increase in overall profits due to higher sales volumes. A pricing strategy based on competition requires the right tools and approach.

Cons

1. Risk of price wars: Aggressively undercutting competitors can trigger a cycle of price reductions, leading to a "race to the bottom" where all businesses in the market suffer from thinner profit margins.
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2. Ignores unique value: Focusing solely on competitor prices neglects the unique features, benefits, or quality that a product or service might offer, potentially undervaluing the brand’s offerings.
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3. Potential for lower profit margins: To match or beat competitor prices, companies may need to accept leaner profit margins, which can impact long-term financial sustainability, especially if cost structures are not carefully managed.
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4. Can damage brand perception: Consistently offering the lowest prices can sometimes lead to a perception of lower quality or value in the eyes of consumers, harming the brand image over time.
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5. Sustainability challenges: Relying solely on pricing based on competition without a clear sense of internal costs and market dynamics can create long-term sustainability woes if the chosen price points do not cover expenses and reinvestment.

Remember: Set competitive prices that attract customers while maintaining profitability. Businesses must also balance competitive prices with their unique value proposition.

Key competitive pricing strategies

Competitive pricing offers lots of strategies to gain a market edge. Let’s zoom in on what those are.

Price matching

This means aligning your prices directly with competitors. However, do keep in mind that success hinges on setting your product apart through superior features or service. 

Example: A new subscription platform matches a competitor's basic tier price but emphasizes its state-of-the-art automated invoicing tech.

Price undercutting 

Offering lower prices than competitors aims to attract price-sensitive customers and quickly build market share. Profitability requires efficient operations and a clear understanding of your pricing, especially if you use cost-based pricing. 

Example: A new billing platform offers a remarkably cheaper entry-level plan, banking on volume.

Price leadership 

Strategically pricing above or below competitors influences customer perception. Premium pricing works with strong value-based pricing and brand equity. Economy pricing demands cost efficiency. 

Example: A SaaS business with superior user support and specialized features prices its top tier higher. A basic recurring payments provider targets the lowest price point for broad appeal.

Hybrid and dynamic models 

These advanced strategies combine competitor price analysis with real-time factors like demand and promotions for automated adjustments. 

Effective dynamic pricing requires rich data analysis and swiftness in your response. 

Example: A SaaS platform adjusts tiered pricing based on competitor discounts and fluctuating demand for specific features.

Note: For deeper insights into competitive analysis methodologies, explore our guide on competitive pricing analysis and discover pricing analysis software that can speed up your research process.

Which metrics should I track when monitoring competitors?

Track price levels and promotions, how often prices change, the value offered at each tier, CAC tactics, and retention signals so that you can link competitor moves to your acquisition, churn, and margin.

Monitoring competitors provides vital insights for pricing based on competition. Key metrics to track are as follows:

• Competitor pricing and promotions: Track not just list prices but also discounts, bundles, and limited-time offers across all their plans. Understand the conditions and durations of these promotions.
• Pricing changes and frequency: Note when and how often competitors change their prices. Is it reactive, seasonal, or part of a larger strategic shift? Analyze the magnitude of these changes.
• Feature and value proposition at each price point: Go beyond basic feature lists. Understand the value competitors are offering at each price tier. What problem are they solving for their customers at that price?
• Customer acquisition cost (CAC) and strategies: Estimate or infer their customer acquisition cost (a key SaaS metric) and analyze their methods, free trials, content marketing, and partnerships. How does their pricing support their acquisition strategy?
• Customer retention rate and tactics: Look for clues about their retention strategies, loyalty programs, upgrade paths, and customer support quality. Is their pricing structured to encourage long-term commitment?

Extra tip: A pricing matrix is vital. It should not only compare features and prices but also highlight perceived value. Also, monitoring competitor pricing analysis provides vital insights for pricing based on competition.

Note: Dynamic pricing strategies can significantly enhance your competitive positioning. Learn more about the benefits of dynamic pricing and how it complements competitive pricing approaches.

Real-life competitive pricing examples 

Real-life competitive pricing examples show how companies strategically adjust their pricing to gain an advantage. Let’s jump to the competitive pricing examples.

Microsoft Teams: Bundling to undercut

Microsoft Teams used bundling as a competitive pricing strategy. By including Teams for free with existing Microsoft 365 subscriptions, Microsoft effectively matched Slack's core functionality at no extra cost for many businesses. Slack found it hard to compete on price. 

The outcome was a massive shift in market share, with Teams surpassing Slack in daily active users. Even after unbundling due to regulatory pressure, Teams maintained its dominance, showing bundling's power in competitive pricing.

Notion: Freemium to capture market share

Notion went with a freemium, value-based pricing strategy. By making its Personal plan completely free, Notion undercut competitors like Evernote, which had limited free usage. This low barrier to entry drove rapid user growth. Monetization focused on team and enterprise plans with tiered pricing based on value. 

This competitive pricing allowed Notion to gain significant popularity, forcing competitors to react to the expectation of free personal use.

Mailchimp: Rebundling and changing metrics

Mailchimp rebundled features and changed its pricing metric as it expanded beyond email marketing. New tiered plans included more features, and billing shifted from "subscribers" to "total contacts." While some customers saw price increases, this competitive pricing aimed to reflect the platform's broader value. 

Despite initial backlash, Mailchimp's revenue and valuation grew, indicating the success of this strategy in repositioning the company as a full-featured marketing platform.

HubSpot: Simplified tiered pricing across products

HubSpot simplified its pricing to a unified seat-based model across its various "Hubs." This addressed complexity and aimed for value-based alignment. By charging per "Core User" and offering free "view-only" access, HubSpot made its platform easier to buy and scale. 

This competitive pricing adjustment sought to accelerate growth and improve user retention by removing pricing friction and positioning HubSpot as a flexible platform.

Note: These examples showcase various approaches to pricing strategy. To explore different frameworks for your business, check out our guide to pricing models for products.

How to run a competitive pricing analysis in 7 steps

Running a competitive pricing analysis informs your strategy. Here's a more in-depth look at the essential steps:

1. Define the segment and the “job.” State the buyer, use case, and direct/indirect rivals.
2. Inventory competitor offers. Capture plans, price points, fences, terms, and monetization metrics.
3. Normalize to apples-to-apples. Convert to unit economics (per seat, per 1k events, per GB) and compute CPI.
4. Benchmark value drivers. List differentiators that justify premium pricing.
5. Choose your pricing strategy based on competition: premium, parity, or undercut and for how long.
6. Set guardrails. Define floor/ceiling, discount bands, and approval workflows.
7. Test and monitor. A/B prices or simulate first; then review CPI, win rate, and margin monthly.

Note: Implementing competitive pricing analysis requires the right tools and methodology.

Top competitive pricing tools: Comparative chart

Best practices for managing competitive pricing

Effective management of competitive pricing requires ongoing effort and a structured approach. Here are the key best practices:

• Lead with value. Use premium pricing where differentiation is clear.
• Avoid reactive slashing. Set floors; don’t chase every discount.
• Measure impact instead of only activity. Track CPI, margin, and retention together.
• Bundle with intent. Use bundles to shift price perception and ARPU.
• Review quarterly. Re-run your competitor pricing analysis every 90 days.

How Orb supports pricing changes and billing accuracy

We’ve looked at competitive pricing strategies and examples. To execute pricing changes cleanly, you need billing that adapts fast and invoices that stay accurate.

That's where Orb comes in.

Orb is a billing platform for SaaS and GenAI companies. It centralizes metering, pricing, billing, invoicing, and reporting so your team can launch, test, and maintain pricing without breaking downstream finance workflows. Here’s how Orb helps:

• Design and launch plans fast: With Orb, teams define clear pricing rules, unlock their usage data, and generate auditable invoices. Monetization keeps pace with product changes since pricing and billing changes don’t require engineering, and teams can ditch fragile spreadsheets.
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• Model before you ship: Orb Simulations uses your historical data to simulate how different pricing models affect your revenue and usage. Finance and product teams make more informed decisions.
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• Bill accurately as pricing evolves: Orb ingests raw event data at scale and provides a full audit trail for every invoice. By decoupling usage data from pricing logic with Orb RevGraph, invoices remain accurate and up-to-date even as plans change.
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• Build metrics your way: Define billing metrics with the Orb SQL Editor or a visual editor and build new pricing plans. Even as you evolve pricing, invoices are automatically recalculated to remain accurate. 
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• Keep systems in sync: Direct integrations with financial tools keep usage and revenue data consistent across your stack.

Make sure to learn more about how we’ve solved pricing and billing for our customers by reading our case studies. 

Ready to move to dynamic, data-driven monetization? Discover how Orb can help you scale faster and check our flexible pricing options to find a plan that works for you.