UTS24760 Chap.7 Competition Based Pricing and Price Tactics
Competition Based Pricing and Price Tactics
Competition based pricing sets prices primarily by looking at what competitors charge rather than at the firm's own costs or at customer demand. It turns up wherever offers are close substitutes and buyers shop on price, which is the same as saying it is the default in markets with high elasticity and thin differentiation.
The method's core is competitive analysis: identify direct competitors, research their pricing strategies, and gather data on prices, discounts and any value added services.
Only after that does the posture become a choice between pricing lower to attract price sensitive buyers and gain share quickly, pricing at the same level to avoid a price war while differentiating on service, reputation or quality, and pricing higher to stake out the upper end, which collapses unless the brand and the proposition behind it are strong enough to carry the gap.
Its advantages are real: simplicity and ease of implementation, since no complex cost calculation or demand research is needed and prices can be adjusted quickly; low risk, because aligning with established competitors gives a normalised price point; and market relevance, because the figure never drifts away from what buyers have been conditioned to expect.
Its three disadvantages share one root, which is that the hard question has been outsourced. It risks price wars in which businesses lower prices until no one is profitable, devaluing an entire industry's products; it ignores internal costs, so a firm can end up selling at a loss when competitors are more efficient; and it produces a lack of differentiation, making a unique brand identity hard to establish.
The chapter then separates four tactics that look identical at the shelf edge and are not: predatory pricing, bait pricing, loss leaders and penetration pricing, two of which are unlawful and two of which are ordinary practice. It closes by noting where pricing psychology enters, including the positioning work done by a price ending, and what Module 5 adds on psychology and bundling.
What this chapter covers
- 01
What competition based pricing is and where it is common
- 02
Competitive analysis comes before the posture
- 03
Pricing lower, level or higher
- 04
Three advantages that all follow from outsourcing the question
- 05
Three disadvantages that follow from the same property
- 06
Costing a price war with the break even identity
- 07
Predatory, bait, loss leader and penetration compared
- 08
Where pricing psychology enters and what Module 5 covers
A competitor cuts twelve percent: match or hold?
- +1Base position. Unit contribution is $1,470 and the margin is 35%, so total contribution is 900 times 1,470 = $1,323,000.
- +1Option A, match. The new price is $3,696 and unit contribution falls to $966, so at unchanged volume contribution is $869,400, a loss of $453,600. The break even volume change for a 12% cut at a 35% margin is 0.12 divided by 0.23 = 52.2%, and the premise of matching is that volume does not rise at all, so matching is a guaranteed loss.
- +1Option B, hold. Volume falls 18% to 738 units and contribution is $1,084,860, a loss of $238,140, roughly half the damage of matching.
- +1Option C, differentiate. Adding a service inclusion costing $180 a unit leaves contribution at $1,290; if it limits the decline to 6%, contribution is 846 times 1,290 = $1,091,340, marginally better than holding and far better than matching, and it does not reset the reference price. Recommend C, and note that the decision reverses only if the true loss from holding exceeds about 34%.
Key terms
- Competition based pricing
- Setting price primarily by reference to competitors' prices rather than to internal costs or customer demand, after a competitive analysis of their prices, discounts and value added services. The posture chosen is to price below, level with or above the identified competitors.
- Price war
- A spiral in which firms continuously undercut one another until no one is profitable, devaluing the industry's products and eroding margins for every participant. In a fully matched war the relative price is unchanged, so the volume gain is zero by construction and the entire cut transfers value to customers.
- Loss leader
- An item sold at a very low price, often below cost, to attract customers who may then buy other more profitable items. It is lawful commercial practice, commonly used by new entrants, and its defining feature is that customers can actually buy the advertised product.
- Predatory pricing
- Selling under cost with the aim of driving a rival out of the market or seriously weakening it. Selling below cost is acceptable in itself; what makes the conduct unlawful is the duration and the purpose, which is why legal advice may be required.
- Bait pricing
- Advertising an unrealistically low price while the quantity available is very low or absent, so customers cannot transact at the advertised price. It is unlawful, and the deciding fact is availability rather than the size of the discount.
- Penetration pricing
- Selling at a lower price in order to enter a new market and acquire share quickly over a short period. A month free on a subscription service is a familiar form, and it is lawful ordinary practice.
Competition Based Pricing and Price Tactics FAQ
How do I tell a loss leader from predatory pricing in a case?
Ask two questions. Can the customer actually transact at the advertised price, in reasonable quantity and for a stated period? If not, it is bait pricing. What is the stated purpose and how long will it run? A temporary below cost price intended to build traffic is a loss leader; a sustained one whose purpose is to remove a rival is predatory.
Both tests rest on facts a case will give you, such as stock levels, promotion length and internal statements of intent, rather than on the size of the discount.
Why is a fully matched price war guaranteed to lose money?
Because the break even volume change assumes your customers respond to a change in your relative price. If every firm cuts by the same amount, relative prices are unchanged, so there is no reason for volume to move at all, while every firm's unit contribution has fallen. The arithmetic is then unambiguous: the entire cut is a transfer from the industry to its customers.
That is the analytical content behind the warning about price wars, and it is why the right response to a competitor cut is usually to compute the hurdle before deciding whether to follow.
What does a price ending have to do with strategy?
It signals a proposition before any feature is compared. Nine ending prices and everyday low price messaging belong to cost leadership; rounded pricing, low price variability and avoided promotion belong to premium branding. A luxury brand pricing at $99.99 is telling customers it wants to be compared on price, which is precisely what its proposition needs them not to do.
Module 5 goes further into it, dealing first with the way buyers read a price and then behave on what they have read, prospect theory and reference price among the frameworks it draws on, and second with bundling: how it is put into practice, and what each way of doing it tends to deliver.
Assessment move
Practise the match or hold decision until it is a reflex, because some version of it appears in nearly every competitive case. Set it up as four rows in a spreadsheet, base, match, hold and differentiate, each with price, unit contribution, volume and total contribution, and compute the indifference volume where holding costs the same as matching.
That indifference point, rather than a point estimate of lost volume, is what a strong recommendation presents. For the tactic vocabulary, do not memorise definitions in isolation.
Draw the two by two of below cost or not against intent to attract buyers or harm a rival, place the four named tactics in it, and then test yourself on borderline cases until you can name the deciding fact for each: availability for bait pricing, duration and purpose for predatory pricing.
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