Competitive Pricing: Definition, Tips, and Strategies

Learn competitive pricing basics, proven tactics, and examples to set profitable prices, protect margins, and grow sales.

Competitive pricing can make the difference between closing a sale and losing a customer to a competitor. Shoppers constantly compare prices—72% of North American adults use their phones to compare prices while shopping in-store.

Set prices too high, and you might lose customers. Price too low, and you’ll shrink your profit margins and weaken your brand image. The challenge is finding a pricing strategy that keeps you competitive while maintaining profitability.

Here’s what competitive pricing is, its key benefits, and how to get it right for your business.

What is competitive pricing?

Competitive pricing means setting your product’s price based on what your direct competitors charge for similar items. It’s also called competitor-based or competition-based pricing.

Instead of relying only on internal costs, this approach focuses on matching the market rate. The goal is gaining market share without starting a price war that damages your profit margins.

Activewear brand Gymshark prices its flagship leggings at $40 to $60, deliberately below Lululemon’s $98-plus alternatives but above fast-fashion basics from H&M. This positioning between budget and premium rivals appeals to price-conscious shoppers while protecting profit margins.

This is competitive pricing at work: setting prices within a competitive range to win market share without sacrificing your value proposition.

Key components of competitive pricing

Effective competitor-based pricing strategy relies on three core elements:

• Market research: Know what your customers need, how much they’ll pay, and how they perceive value. This reveals the price range they expect and accept.
• Competitor monitoring: Track rivals’ pricing, discount patterns, and product positioning. Tools like Shopify app PriceMole can help you respond quickly to competitor price changes without constant manual research.
• Pricing adjustments: Apply insights from research and monitoring to update your pricing. Whether you’re raising prices, lowering them, or creating bundles, track the impact on traffic, conversions, and margins.

Customer feedback plays a crucial role, too. “We rely on customer support tickets,” says Karolis Numgaudis, VP of finance and operations at Omnisend, in regards to how the brand approaches pricing. “They show where customers get confused about pricing, expect more value, or would pay extra if something were added or packaged differently.

“We also track the actual value we deliver—measured by the orders and sales we generate—to understand [return on investment] and identify where pricing can stretch based on real outcomes.”

Types of competitive pricing strategies

Competitive pricing takes different forms—premium pricing, undercutting, price matching—but they all fall under three main categories.

1. Lower pricing

Lower pricing (or undercutting) means pricing your product below competitors to quickly win market share, block new entrants, or attract price-conscious customers. It can drive customer acquisition, but overuse risks price wars and shrinking profits.

Here are some lower pricing tactics:

Penetration pricing

Penetration pricing means launching your product well below the market average, then gradually raising prices once you’ve built awareness and loyalty. The low price acts as marketing, helping you grab market share quickly while keeping acquisition costs down.

This works best when you have cost advantages—like in-house production or bulk sourcing—and need to break into a crowded market.

“When launching a new product, I typically choose a penetration pricing strategy to quickly build customer base and recognition,” says Tracie Crites, chief marketing officer at Heavy Equipment Appraisal. “However, if the product offers a premium feature or is highly differentiated, I lean toward value-based pricing to highlight the added value.”

Example: A skin care startup might release a hero serum 30% cheaper than top competitors, earn rave reviews, then slowly increase the price over time.

Promotional pricing

Promotional pricing involves offering limited-time discounts below your regular price to drive quick traffic, clear seasonal stock, or grow your email list—without permanently cheapening your brand.

Shopify’s discount codes feature makes this easy. Create flash sales, percentage-off deals, and coupons that give customers a compelling reason to buy now.

Example: An athleisure brand might run a 48-hour flash sale on slow-moving colors to boost sales and capture new email subscribers.

Loss-leader pricing

Loss-leader pricing means selling a popular item at or near cost to bring customers in, then making your profit on higher-margin products. This encourages larger orders and builds repeat business.

This strategy works when you have a broad product range with healthy margins elsewhere.

Example: A coffee gear shop could sell reusable cups at cost, banking on customers returning for premium beans and accessories where the real profit lives.

Bundle pricing

Bundle pricing (also known as price bundling) involves grouping related products at a lower combined price than buying separately. This boosts average order value, moves slow inventory, and makes buying decisions easier for customers.

Example: An online pet store might bundle dog treats with grooming wipes for $16, when each item alone costs $10. The savings feel significant, and you move more products per transaction.

2. Higher pricing

Higher pricing means setting your prices above market average to signal premium quality or exclusivity. Luxury brands and companies with strong brand equity use this approach when they have few direct substitutes. The goal is maximizing margins while building a premium brand image.

Here are some higher pricing tactics. 

Price skimming

Price skimming involves starting with a high price for new, innovative products, before lowering it gradually as demand slows. This maximizes early profits, recovers R&D costs, and funds future product updates.

Example: A smart home device might launch at $999, drop to $899 after six months, then settle at $749 as competitors introduce similar products.

Premium pricing

Premium pricing (also known as prestige pricing) is about keeping your product priced well above average to highlight quality, craftsmanship, or exclusivity. This works best when your product clearly stands out through better materials, limited editions, or lifetime support—building both brand image and profit.

Example: A handcrafted leather belt might cost 50% more than mass-market options to maintain its luxury appeal.

Captive pricing

Captive pricing is when you price your core product competitively, then make profits on complementary products. This creates steady, high-margin recurring revenue once customers commit to your ecosystem.

This strategy works well when you have add-on items that enhance functionality or extend your core product’s life.

“If it’s possible in your industry to do the captive pricing play, it often makes sense,” explains Nabeel Siddiqi, founder & CEO of PricePerfect AI. “This is further required if you have an industry where you are reselling products that are not manufactured by you. If this is the case then captive pricing is almost a necessity.

“For smaller DTC brands, captive pricing is more of a nice-to-have. It can pad the bottom line if there are natural add-ons to the core product.”

Example: A label printer might be priced modestly, but the branded label rolls carry the real markup. Video game consoles work similarly—sold at cost while games and accessories deliver higher profit margins.

3. Equal pricing

Equal pricing means matching competitors’ prices to retain customers and build trust by eliminating price concerns. But it can hurt margins if competitors constantly discount.

Here are some equal pricing tactics:

Price matching

Price matching means promising to match any advertised competitor price for the same product—either at checkout or within a refund window. Shoppers feel confident they won’t overpay, so they focus on service, speed, or loyalty perks instead of hunting for better deals.

This works best when your margins are healthy at market rates and you can automate price monitoring.

Example: An electronics retailer might match competitors’ prices at checkout and promise to refund the difference if customers find the same model cheaper within 14 days.

Parity pricing

Parity pricing means keeping your prices aligned with market averages, so you can compete on non-price factors like faster shipping, flexible returns, or loyalty programs.

The benefit is stable margins since you’re not discounting, but your pricing still feels fair to shoppers.

Example: A 3D printer brand might price its flagship model like mainstream competitors, but win buyers with longer warranties, eco-friendly materials, and an active user community.

Competitive pricing examples

Here are real-world examples of each competitive pricing strategy:

Competitive pricing strategy	Business example	Why it fits
Penetration pricing	Disney+ launched at $6.99/month—much cheaper than Netflix.	The low price helped Disney+ grab millions of subscribers quickly before raising prices.
Promotional pricing	Amazon Prime Day runs two days of deep discounts each year.	Short-term deals create massive sales spikes without cutting everyday prices.
Loss-leader pricing	Sony PlayStation hardware sells at low margins.	Sony makes real profits on higher-margin games, accessories, and subscriptions.
Bundle pricing	McDonald’s Happy Meal combines food, drink, and toy for one lower price.	The bundle increases average spend and moves more items per transaction.
Price skimming	Apple iPhone launches at premium prices, then drops as new models arrive.	Early adopters pay more, helping Apple recover R&D costs quickly.
Prestige pricing	Rolex keeps its watches far pricier than mass-market brands.	The high price signals exclusivity and luxury.
Captive pricing	Gillette sells razors cheaply but charges more for blade refills.	Customers need ongoing refills, which provide Gillette’s main profit.
Price matching	Best Buy promises to match competitor prices on identical products.	Shoppers stay loyal because they know they won’t overpay.
Parity pricing	Major hotel chains keep consistent room rates across their sites and travel apps.	Equal prices prevents undercutting and lets hotels compete on service quality.

 

Read more: How To Run Pricing Experiments That Maximize Revenue

Advantages of competitive pricing

Using competitive pricing offers several key benefits:

• More traffic and sales: Pricing your products in line with or below competitors helps you appear in price filters and comparison tools. This brings more ready-to-buy shoppers to your store.
• Market-share protection: In fast-moving categories, even small price gaps can push shoppers to switch brands. Regular competitor monitoring helps you stay competitive and avoid losing customers to cheaper alternatives.
• Stronger brand trust: Fair, transparent pricing builds your brand image. This leads to higher customer loyalty, stronger brand equity, and more word-of-mouth referrals.
• Low risk: Basing prices on established competitors can feel less risky since it aligns with what customers already expect to pay.

Disadvantages of competitive pricing

Competitor-based pricing also has significant drawbacks:

• Product blind spots: Over-relying on competitor pricing can make you ignore your own costs and unique product features. You might miss chances to price higher based on your unique value proposition.
• Shrinking profit margins: Constantly matching or undercutting prices can erode your profit margins, especially when you lack significant cost advantages over competitors.
• Price war risk: Aggressively undercutting competitors can trigger a “race to the bottom” where everyone’s margins get squeezed. This hurts long-term sustainability for all businesses involved.
• Brand devaluation: Always being the cheapest option can create perceptions of lower quality or value among consumers.

How to do a competitive pricing analysis

Ready to compete on price? Here’s how to conduct a competitive price analysis and set prices against competitors’ comparable products.

1. Understand your product

Start by understanding how your product stacks up against the competition. Create a comparison table to evaluate whether your new pricing strategy will be profitable. List your product’s:

• Key features 
• Target market
• Value proposition
• Costs and margins

Get deeper insights by surveying customers. Your post-purchase confirmation email should ask questions like, “Why did you purchase this product?” These answers guide you toward completing this section of your competitive analysis.

2. Identify your competitors

List the brands your customers actually compare you with—not just the biggest names in your industry. Use these tactics to find them:

• Search results and shopping ads: Search your main keywords and note which brands appear repeatedly
• Marketplace “Similar Items”: Platforms like Amazon, Etsy, and Walmart show what shoppers browse next
• Customer feedback: Ask buyers in chats or reviews, “Which other brands were you considering?”

Then categorize each competitor as:

• Direct: Same use case and price range as your product
• Indirect: Solves the same problem but differently or at a different price point

Focus on a small, relevant set of competitors to keep your analysis clear and actionable.

3. Compare competitors’ products

Create a table of prices and features to clearly show how your product differs from and resembles competitors’ products. Credit card comparison websites offer good inspiration for this type of table.

In your comparison, note how competitors market and position their products. Do they target the same market as you? If not, who are they trying to reach? Both factors impact pricing—some customer segments will pay premiums for products that matter in their daily routines.

Jay Soni, marketing director at Yorkshire Fabric Shop, says competitor price variations matter too: “Consider discounts, how frequently they conduct sales, and how much they discount when they do. All of these things are especially significant when you have similar inventory.”

Finally, list each competitor’s retail price for comparable products. Review the complete list to see where your prices sit relative to the market.

4. Gather and analyze pricing data

Use a spreadsheet or pricing tool to track key data points:

• List price versus final price: Include taxes, shipping, and discounts to compare the real “all-in” cost customers pay.
• Promo patterns: Note how often competitors run sales and when. This affects how shoppers perceive pricing.
• Price range: Find the median and price spread, then see where your product fits in that range.

Next, add your required profit margin to the analysis. If your price fits within the competitive range while staying profitable, you can match or undercut competitors. If not, look at improving your product or cutting costs before lowering prices.

Repeat this process quarterly (or monthly in fast-moving markets) to keep your pricing current. Run controlled experiments with clear benchmarks to optimize your pricing, as Nabell suggests. 

“Essentially, the process is to start with a ‘reasonable’ price point (often derived from competitor prices or cost-plus), then set a price range that you think the product can sell for and set an end date by which you will pick the best price (say 30 days after launch),” she says.

“Then start testing prices in the price range you set. Track average daily revenue and average conversion rates. You want to aim for a price that keeps the conversion rates high and your revenue sufficient.”

Is competitive pricing right for your business?

Before aligning your prices with the market, use these four checks to see if it fits your business goals:

• Conduct a competitor analysis: Research your competitors’ pricing, promotions, shipping costs, and add-on fees to understand their real costs and margins. Use tools like Google Shopping, comparison sites, or a simple spreadsheet updated weekly to spot trends you’ll need to match or beat.
• Calculate production costs: Add up your total cost per unit—materials, labor, packaging, fulfillment, and overhead. Then add the minimum margin needed to cover expenses and grow. If your breakeven price is below market rate, competitive pricing could work. If it’s higher, you may need stronger differentiation or a different pricing model.
• Research customer price sensitivity: Find out what your customers will spend through surveys, interviews, or pricing tests. Review refund reasons or support chats for price concerns. If customers see value in current average prices, matching competitors can improve conversion. If they buy based on emotion or brand loyalty, premium pricing may work better.
• Determine feasibility: Check whether you can stay profitable at competitive price levels without sacrificing quality or service. If your margins remain healthy, competitive pricing can help you grow without hurting your brand. If not, consider value-based or premium pricing, where differentiation matters more than being cheapest.

Things to consider when engaging in competitive pricing

To avoid unnecessary price cuts that hurt your business, here are five key considerations for competitor-based pricing:

Consider your product’s unique value proposition

If your product stands out for quality, craftsmanship, patented technology, or exceptional support, highlight those strengths instead of cutting prices. Discounting a standout product can make shoppers focus on deals instead of value.

“From first-hand experience, setting prices too low can cause customers to wonder whether the quality of the product is on-par with competitors,” says Braden Norwood, product quality manager at VTR Learning. “Benchmarking is just as much about helping customers psychologically value your product as it is about giving them an affordable alternative to other options.”

Don’t default to price matching

Many merchants constantly match or beat competitor prices, even when it’s not necessary. This aggressive price matching can trigger price wars where multiple competitors discount products, driving down profitability across the entire segment.

“Competitive pricing is often talked about as a way to undercut competitors and offer lower prices, but that isn’t always the smartest strategy, so don’t fall into that trap and end up undercutting your own growth,” says Stephen.

Evaluate customer segments

Different customer groups pay different amounts for similar products. Your competitive pricing analysis might reveal patterns like:

• Students operate on tighter budgets than 50-year-olds
• Metallica fans pay more for merchandise than Rolling Stones fans 
• Amazon shoppers are more price-sensitive than social media buyers
• Hot dog stand customers in busy areas pay premiums for convenience

Review your competitive price analysis and compare each competitor’s target market. Find the brand selling to customers most similar to yours for accurate comparisons.

Save competitive pricing for subscriptions

Not every item needs competitive pricing. Reserve your best deals for repeat customers to build loyalty, increase customer lifetime value (CLV), and generate predictable revenue. 

Add a subscription app like Recharge to your Shopify store and offer competitive pricing only to subscribers. Good discounts on recurring orders build customer affinity while giving you steady revenue.

Competitive pricing FAQ

What is competitive pricing in simple terms?

Competitive pricing means setting product prices based on what your competitors charge rather than relying on your own costs or profit margins.

Is competitive pricing good or bad?

It depends on your goals. Competitive pricing helps when it increases traffic and protects market share without hurting your margins. But it can be harmful if it leads to price wars or trains customers to wait for discounts.

What is a competitive pricing strategy?

A competitive pricing strategy means choosing prices based on what your competition charges. The goal is to match, slightly beat, or position yourself within competitors’ price ranges.

How does competition affect pricing?

More sellers with comparable products create downward pressure on prices. Each new competitor widens the price range, and shoppers gravitate toward offers that feel fair or slightly cheaper. This forces brands to differentiate or match the going rate.

How does competitive pricing affect consumers?

Buyers benefit from lower prices and more transparency. The downside: If prices drop too much, shoppers may start doubting product quality.

What is an example of competitive pricing?

Disney+ launched at $6.99 per month—purposely much lower than Netflix to attract new subscribers. Once it built a loyal customer base, it gradually raised prices.

Why do companies engage in competitive pricing?

Competitive pricing helps brands gain visibility, meet shopper expectations, and protect market share without overspending on advertising. Done right, it can boost sales while keeping margins sustainable.

What are other names for competition-based pricing?

Competition-based pricing is also called competition-driven pricing, market-based pricing, or competitor-based pricing.