Woman working in a coffee shop making a cup of coffee.
From performing a competitive pricing analysis to setting a pricing strategy, there are several key ways business owners can price their products without stifling growth. — Getty Images/SDI Productions

Price is almost always a factor when a customer makes a purchase decision. While your company can win on convenience, delivery speed, customer service, or branding, ultimately many customers simply choose the more affordable option.

[Read more: 6 Steps to Market Your Business in a Competitive Market]

Competitive pricing — benchmarking the price you set for your product or service based on comparable competitors in the market — can help you win customers. But you may also risk setting your price too low to cover your overhead and other expenses. Compete with your competitors’ pricing using these steps to set a price that generates sales without stifling growth.

Assess if you’re in a price war

A price war is when two competitors continuously lower the price of their products in a strategic attempt to undercut one another and capture greater market share. Unfortunately, small business owners can find themselves in a price war if a big enterprise is trying to drive them out of the market by making it untenable to continuously drop the price of a product.

A price war can be bad for everyone’s business. “Price wars can create economically devastating and psychologically debilitating situations that take an extraordinary toll on an individual, a company, and industry profitability,” wrote Harvard Business Review. “No matter who wins, the combatants all seem to end up worse off than before they joined the battle.”

If you find that your competitor is engaging in a price war, you may need to take a different approach to competing with their prices. Price wars can drain a company’s resources quickly and impact the customer experience. Be careful about engaging in behavior that can potentially trigger this event, too.

Competing on price can quickly lead to over-discounting your good or service and devaluing your brand. To avoid the risk of your product or service becoming a commodity, emphasize the other unique selling points of your company.

Complete a competitive pricing analysis

Assuming you aren’t in a price war, the next step is to perform a competitive pricing analysis. In this step, you’ll assess your product line, your competitors' pricing for equivalent products, and your budget.

Start by creating a comparison table. In the first column, record your product’s key features, target market, value proposition, and costs and margins. Do the same for each of your competitors and include the price point they charge for the comparable product.

“Do they have the same target market as your product? If not, who are your competitors trying to reach? Both of these elements impact the price of a product. Some customer personas are willing to pay a premium if the product is important in their daily routine,” wrote Shopify.

Use this table to get a clearer picture of what your competitors offer, how their product differs from yours, and what customers are willing to pay for in order to solve their problem.

Set a pricing strategy

There are three pricing strategies you might use based on this competitive pricing analysis: penetration, promotional, and captive pricing.

  • Penetration pricing: Typically used when launching a new product or entering a new market, the business offers a lower price initially to attract customers.
  • Promotional pricing: Used to clear inventory or build momentum, the business offers a temporary discount for a limited time to attract customers.
  • Captive pricing: The company sells one core product along with multiple accessory products, also known as captive products. For instance, a smartphone with wireless headphones and other accessories.

You may choose one of these strategies or use all of them depending on where you are in your business growth. There are pros and cons to each of these strategies. Ultimately, you want to drive sales based on what makes your company unique, rather than what your competitors are doing.

[Read more: Why Top Brands Are Using These Pricing Strategies to Drive Business in a Challenging Environment]

Compete on other features

Competing on price can quickly lead to over-discounting your good or service and devaluing your brand. To avoid the risk of your product or service becoming a commodity, emphasize the other unique selling points of your company. Use your competitive analysis to find a feature that makes your brand different than your competition. “Not all products are created equal. Many customers pay a premium for quality,” wrote Shopify.

As the market begins to discount their offering, it can be tempting to follow suit. Instead, consider holding firm on your pricing and changing up your messaging. Focus on quality, premium customer service, and other aspects that make the customer feel like they are receiving great value.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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