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Competitive pricing analysis 101

Last updated

1 April 2024

Author

Dovetail Editorial Team

Reviewed by

Cathy Heath

Determining the right price for your product or service is always challenging. A high price can keep customers away, while a low price could make your business unprofitable.  

Since you want to make money without losing the competitive edge, studying what the competition has to offer is imperative. That's where a competitive pricing analysis comes in.

Studying how your competition sets prices for its products and services can determine the right approach to pricing and protect your market share.

Let's learn more about a competitive pricing analysis and its business benefits.

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What is a competitive pricing analysis?

A competitive pricing analysis is a data-based study of how the competition's prices compare to yours. This type of analysis is useful across all industries, markets, and business sizes. It's especially applicable in markets with high sales volume.

Undertaking a competitive pricing analysis provides insight into pricing strategy. It helps you distinguish your business from the competition and provides valuable information for pricing similar products.

Businesses usually decide to implement a competitive pricing strategy when the cost-plus approach stops being relevant.

The importance of competitive pricing analysis

According to one study, 80% of consumers compare prices online before purchasing. 

Since most businesses have an established online presence, price comparison is much easier than it used to be—shoppers can simply use their mobile phones. This makes competitive pricing even more important, as the purchasing window can be very narrow.

The key benefits of conducting a competitive pricing analysis include:

Supporting brand identity

Competitive pricing is key to maintaining your market share and generating revenue. It allows you to create a unique brand identity as your prices define your brand. 

For example, you can position your brand as offering a better-quality, higher-priced product if you know how much the competition charges and where you stand compared to them. 

A competitive pricing analysis can help you find opportunities to stand out. With data-driven decisions about sales and promotions, you can outrun the competition by offering a better deal and communicating this effectively.

An analysis can help new brands enter the market faster. Instead of spending resources on research, these companies can use the competition's experience to create an effective pricing strategy to take market share.  

Holding on to profits

Setting prices on your products without analyzing the rest of the industry could risk profit and the financial viability of your business. This is especially important for highly competitive industries, where a product can have a small profit margin. 

A competitive pricing analysis can help you determine the right balance between: 

  • The competition's strategies

  • Your business needs 

  • Break-even costs

  • The final product price, incorporating a profit

Growing your business

A competitive pricing analysis encourages successful pricing management. The right approach can help you find your niche, push out some of the competition, and increase market share.

Improving competitive analysis

Competitive analysis is an integral part of successful business operations. Knowing where your competition stands opens up various growth and development opportunities.

This analysis is an integral part of analyzing your competition. The data it generates can help you discover loopholes in the competition's operations and use them to your advantage. 

You can also gain valuable insight into your business strategy.

Enhancing marketing efforts

A competitive pricing analysis can reveal your competition’s mistakes. When you find a weak spot, you can immediately use it in your marketing and craft content that appeals to the unmet need you identified. This can help you gain market share within days.

Adjusting prices accurately

Depending on your industry, you may need to adjust prices regularly as factors drive demand for a product or service. 

Regular competitive pricing analysis can keep you on top of changing industry needs and prices according to the latest economic trends.

Challenges of using a competitive pricing analysis

The key challenge of implementing a competitive pricing analysis is gathering sufficient information. Not all companies share their prices willingly to maintain their competitive advantage.

While retailers usually provide their prices online, SaaS companies, managed service providers, software developers, and many other businesses don't readily reveal their pricing strategy. Many take a customized pricing approach to each client, which can be confidential. 

Other challenges have to do with the downsides of the competitive pricing approach. It comes with several assumptions:

  • The competition conducts market research

  • The competition sells highly similar or the same products or services

  • The competition has similar sales and marketing goals

  • The competition sets the same prices for online and offline products

Since the above statements aren't always true, the results of the competitive pricing analysis may not provide sufficient data for a transparent, data-driven decision. You still need to do additional market research and rely on experience to adjust your pricing strategy.

In short, a competitive pricing analysis is integral to designing a successful pricing strategy, but finding the information can be challenging. 

You may need to use other strategies to secure pricing information because of the data's sensitive and highly valuable nature. 

Additionally, the vast amounts of data you need to handle due to constantly changing prices could make the analysis labor-intensive.

How to conduct a competitive pricing analysis

To carry out a competitive pricing analysis, focus on high-quality data discovery and consider these steps:

Identify your competition

The first step of running a competitive pricing analysis is determining who your competitors are. Look for companies that offer similar products and services and cater to the same target audience.

To get sufficient data, identify three levels of competitors:

Direct competitors (primary) 

Primary companies sell the same or similar products and target the same audience.

Indirect competitors (secondary)

These companies sell the same products or services but not as their primary offering. 

You can also consider companies that sell the same products or services but cater to another audience, such as a different demographic.

Substitute competitors (tertiary)

Tertiary companies serve the same audience and offer products related to yours. 

For example, if you sell notebooks, your substitute competitor is the desktop computer vendor.

Once you find these competitors and categorize them according to type, the pricing data you collect becomes more precise. You can base pricing decisions on the competition's relation (primary, secondary, or tertiary) to your brand.

As the market changes, so does your competition. You need to review your competitors and their categories regularly.

Determine competitor data parameters

Conducting a comprehensive analysis requires you to determine the type of data you need to collect. It can vary depending on your niche and the competition type you are considering. 

Examples of data types include:

Stock

Monitoring the competition's product availability provides important pricing data. Figuring out how their supply chain operates lets you make smart pricing decisions.

Promotional activity 

Knowing how the competition arranges sales, promos, and discounts can help you figure out when to organize similar activities to attract your target audience.

Price index 

Understanding the company's market position for a particular product or service over a set period can help you see how well the competition's pricing strategy is working.

Collecting this data involves visiting the company's website or offline locations, calling for information, and purchasing products.

Perform pricing data analysis

Pricing data analysis involves searching for patterns in the data you collect from your competition and using them to determine your pricing strategy. 

For example, if your competition is volume discounting, you may opt for promotional pricing.

The key to successful competitive pricing analysis is continuously monitoring the competition's pricing methods. When your competitors raise prices, you may need to do the same. Otherwise, your prices could stop being competitive, affect your profits, or raise a red flag for consumers.

For in-depth analysis, you can use price monitoring tools and competitive pricing analysis software. These solutions can organize the information and generate data for informed pricing decisions.

Leveraging a competitive pricing analysis for your pricing strategy

A competitive pricing analysis can provide valuable data for determining an effective pricing strategy. It can help businesses ensure appropriate pricing and avoid profit loss.

A correct pricing strategy could be the difference between an unprofitable business and an industry leader. 

While a competitive pricing analysis can't be the only source of decision-driving data, it can help your company maintain a strong market position.

FAQs

How do you calculate a competitive price?

You need to conduct a competitive pricing analysis to calculate a competitive price. This involves collecting pricing data from the competition and analyzing pricing patterns.

What is an example of competitive pricing analysis?

An example of competitive pricing analysis is identifying competitor prices on certain products and adjusting yours accordingly.

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