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

What is competitive pricing?

Competitive pricing is a strategy where companies set their prices by studying what competitors are charging, seeking to attract new customers and gain market share.  

Contrary to how it may sound on the surface, it isn’t just mirroring competitors — it’s a pricing strategy based on competition, which means analyzing market positioning, user expectations, and cost structures carefully. 

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 volume sales.
• 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 they will match a competitor's lower price, 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.

Pros and cons of competitive pricing

Using a strategy of pricing based on competition offers benefits in attracting users and gaining market share. Yet, it also presents possible downsides, particularly in terms of profitability and long-term brand perception. 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. This is especially true in markets where products are largely similar.
2. Grows market share: By offering more appealing prices, businesses can encourage customers to switch from competitors, thereby increasing their market share and strengthening their position in the industry.
3. Easy to implement: Compared to more complex pricing strategies that require in-depth cost analysis or value assessment, competitive pricing is often straightforward to put into practice, especially when competitor pricing data is readily available.
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: While individual profit margins might be lower, a well-executed competitive pricing strategy can lead to a notable increase in overall profits due to higher sales volumes.

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.
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.
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.
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, potentially harming the brand image over time.
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 sufficiently cover expenses and allow for reinvestment.

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 (premium) or below (economy) 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.

Which metrics should I track when monitoring competitors?

Monitoring competitor metrics 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, 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, 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 and map your offerings against those of your competitors. 

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 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 comprehensive 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.

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. Map the competitive landscape: Identify and categorize direct and indirect competitors, noting their target audience, pricing models, and initial assessment of their perceived value. This sets the stage for deeper analysis.
2. Analyze competitor pricing and value: Go beyond list prices to analyze their pricing tiers, discounts, and bundling. Critically examine the features and benefits they offer at each level, laying the groundwork for your price matrix comparison. Understand their apparent value proposition.
3. Know your costs and unique value: Accurately calculate your costs and clearly define your product's unique value proposition. Identify key differentiators and assess where value-based pricing strategies might be applicable based on these advantages.
4. Understand customer price sensitivity: Research how your target market perceives price in relation to value. Analyze their price elasticity of demand to understand how price changes impact purchasing behavior. Determine their willingness to pay for your specific features and benefits.
5. Strategize and set prices: Choose a competitive pricing strategy aligned with your goals, leveraging the gathered competitive data and insights into your own and competitors' value. Set your initial prices, informed by your potential for value-based pricing.
6. Leverage technology for monitoring: Use price monitoring tools and competitive intelligence platforms to automate real-time tracking of competitor price changes. Employ these tools to continuously update and refine your price matrix for accurate comparisons.
7. Monitor, measure, and adapt: Continuously track your sales performance and customer feedback in relation to your pricing and competitor actions. Analyze the impact of price changes (considering price elasticity) and be prepared to adjust your strategy and tactics based on market dynamics and results.

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.

Conduct price audits with strategic frequency

Regularly examine competitor pricing, adapting your review schedule to market volatility. Weekly checks suit dynamic sectors, while monthly reviews suffice for stable markets. 

These audits should inform potential adjustments to your own competitive pricing strategy, not just record competitor moves.

Integrate insights across teams

Align Sales, Revenue Operations, Product, and Finance on your competitive pricing strategy. Consistent dialogue ensures pricing reflects market realities, informs product development based on competitive offerings, and supports financial planning with accurate revenue projections. 

This unified view maximizes the effectiveness of your competitive pricing.

Establish intelligent pricing controls

Implement floor and target pricing rules that help sales without sacrificing profitability. These controls should be informed by cost analysis and strategic market positioning, enabling competitive deal-making within acceptable margin levels. 

Consider incorporating triggers for price adjustments based on competitor actions or deal size.

Experiment and validate pricing hypotheses

Systematically test different price points and structures using methods like A/B testing. Analyze the resulting impact on customer acquisition, conversion rates, and revenue. This validation provides data-backed insights to refine your competitive pricing and optimize for profitability and market share.

How Orb helps you make the most from your competitive pricing 

We've explored competitive pricing examples and ways to drive growth for businesses. But to truly make the most from these strategies, you need a billing platform that offers agility.

That's where Orb comes in.

Orb is a done-for-you billing platform. It’s designed to help SaaS and GenAI companies. Unlike rigid, traditional systems that limit your options, Orb unlocks your usage data, giving you the power to experiment with pricing, fine-tune your monetization strategy, and adapt to change without constraints.

Here's how Orb supports competitive pricing agility:

• Experiment without limits: Orb RevGraph and Orb SQL Editor let business teams launch new pricing and support all modern pricing models (usage, subscription, hybrid, and more) — all without engineering involvement. With Orb Simulations, teams can also use historical data to see how pricing changes will impact revenue before pushing those changes live.
• Fine-tune monetization: Move beyond static billing. Orb gives you the tools to adjust pricing, add tiers, roll out promotions, and automate price changes so you can improve your revenue in response to the market.
• Data-driven decisions: Orb provides the insights you need to understand customer behavior and usage patterns so you can make informed pricing decisions and quickly adapt your strategy.

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.