Competition-Based Pricing: Outsmarting Your Rivals One Price at a Time

There’s a classic scene in business that’s been played out a million times—two coffee shops across the street from each other. One tweaks its price by just a hair—a dime here, a dollar there. A few days later, the other shop follows suit. It’s like a slow, intricate dance with customers looking on, deciding who leads better.

And while this quaint image involves coffee, the same dynamics apply to SaaS tools, consumer goods, or any market where the competition is a scroll, click, or stroll away. This pricing strategy? It’s called competition-based pricing.

It might seem simple. Just match or beat your rival’s prices, right? But in truth, it's a lot more nuanced. A chess game where every move is both a risk and an opportunity. If you own a marketing agency or have clients struggling to set prices, this isn’t a theoretical exercise—it’s an urgent puzzle to solve. Let’s unpack it together.

The Dance of Competitive Pricing

Competition-based pricing, sometimes called market-oriented pricing, means basing your prices primarily on what competitors are charging. Not your costs. Not what you think the product is inherently worth. Not even what customers are willing to pay—but on what your rivals are doing. The idea isn’t to undercut every time—it’s to stay in the neighborhood of what others offer, without giving away the farm.

Think about airlines—it’s one of the most obvious examples. Ever notice how ticket prices for the same route on different carriers look oddly similar? That’s competitive pricing at work. Companies watch each other constantly, staying close enough to signal, “We’re in the same game,” without triggering a full-blown price war that could destroy margins.

For businesses, this pricing strategy is more than a choice. It’s a survival tactic. In an age where shoppers have more access to information than ever, your price isn’t just about what you’re offering—it’s about what others are offering, too. It’s about making your customer stop their endless scrolling and say, "That seems fair." And in many industries, particularly mature ones, pricing is often the loudest signal of quality and positioning.

The Pros and Cons of Following the Pack

Now, competition-based pricing has its set of perks. First and foremost, it's fast. When you’re trying to launch a product quickly or respond to market changes, looking at your competition allows you to shortcut complex calculations and get to a ballpark figure that’s reasonable.

The other advantage is that it’s market-relevant. If everyone else is charging between $50 and $60 for a subscription box of artisan dog treats, setting your price at $150 makes you look like you’re from another planet. Competitor pricing gives you an anchor. It helps you fit in, especially if you’re a new player trying to earn credibility.

But let’s not gloss over the downsides. One key drawback is that competition-based pricing can lead to a “race to the bottom.” Imagine you’re a SaaS tool and your competitor just dropped their subscription price by 10%. The pressure’s on. Should you cut yours too? If everyone keeps undercutting everyone else, you all risk gutting your margins to the point where nobody wins—except maybe the customers.

Moreover, focusing too heavily on competitor prices can make you lazy about differentiating your product. If all you do is match prices, there’s little incentive to innovate or focus on value-added services. Your whole brand identity can get swallowed up in a simple equation—your price minus a dollar.

When to Use Competition-Based Pricing

So when does it make sense to dance this pricing dance? Here are a few specific scenarios where it works best.

1. Commoditized Products

If you’re selling a product that’s hardly different from what others offer—think gasoline, basic SaaS features, or standardized services—competitive pricing isn’t just sensible. It’s almost mandatory. Customers can’t tell the difference between your product and your competitor’s, so they’re likely to choose based on price alone.

In a market like this, a premium price feels out of place. Why should someone pay more for the same gallon of gas or for cloud storage that’s identical to the competitor's? Unless you find a different way to stand out, matching the competition keeps you relevant.

2. New Market Entry

When you’re a newcomer in an already-crowded field, coming in at a competitive price is a way to start conversations. You lack reviews, a solid reputation, and loyal customers. But if your price is comparable—or just a smidge lower—you have a shot at convincing people to give you a try.

Take rideshare apps as an example. When Lyft launched, they didn’t set fares 20% higher than Uber. They positioned themselves closely, and sometimes even cheaper, until people could experience the slight nuances Lyft brought to the table—like the infamous pink mustache.

3. Price-Sensitive Audiences

Not all consumers are price-sensitive, but some certainly are. Competition-based pricing works particularly well in cost-driven markets—think budget airlines, low-end retail, or commodity software. Here, your customer is looking at price as one of the primary, if not the only, differentiator.

In these situations, staying within the price range set by the competition makes you an option on the table. Fall outside that range, and price-sensitive customers will likely dismiss you outright.

Avoiding the Price War Trap

Competitive pricing sounds simple—until you’re in the middle of a brutal price war. Picture this: You drop your price, then your competitor drops theirs lower. You retaliate. They counter. Before you know it, margins have vanished. You’re both fighting over scraps, with neither side benefiting.

But here’s the thing—a price war is only inevitable if price is the only lever you’re pulling. You’ve got other tools. Brand, customer experience, added value, convenience—all these elements contribute to the customer’s perception of “worth” far beyond just price.

1. Differentiate or Die

One of the best ways to sidestep a price war is to focus on differentiation. Sure, you could charge exactly what your competitors are charging. But what if your product offers something uniquely valuable? What if you bundle in a stellar onboarding experience for that SaaS tool, or extra consulting hours with that B2B service?

Look at Apple—they’re masters of differentiation. They don’t compete with other phone manufacturers purely on price. Instead, they use a combination of design, brand equity, and integration into their ecosystem to justify their premium prices.

2. Use Price Anchoring

Another way to avoid a race to the bottom is through strategic price anchoring. Introduce multiple pricing tiers, where one product—perhaps a “premium” version—is higher priced. This makes your competitively priced standard product look like a reasonable, even smart choice.

Companies like Adobe do this exceptionally well with Creative Cloud subscriptions. There’s a low-priced plan, a high-priced “full bundle,” and several options in between. The key here is to make the customer focus on choosing between tiers, rather than comparing only with competitors.

3. Add Value Instead of Cutting Price

If you notice competitors undercutting prices, try to add more value to your offering rather than simply dropping your rates. This could be through customer support, free add-ons, or loyalty programs. The key is to shift the narrative from “Who is cheaper?” to “Who offers more value for the price?”

For instance, Amazon’s Prime program isn’t just about cheap pricing—it’s about the added value of fast shipping, streaming content, and exclusive deals. Prime costs more upfront, but for many consumers, the added benefits make it a no-brainer.

Case Studies of Competitive Pricing

1. The Airline Industry

The airline industry is a hotbed of competition-based pricing. Take Ryanair and EasyJet in Europe. The two budget carriers constantly adjust their fares based on one another. Their pricing isn’t simply a reflection of their costs—it’s a signal to their customers about what’s available, and at what value.

In this highly price-sensitive market, matching prices (or undercutting) has become a critical strategy for capturing demand. However, this pricing strategy isn’t without pitfalls—recent reports suggest that consumer satisfaction with budget airlines is falling, as they continually cut costs to remain competitive.

2. The Software Wars: Dropbox vs. Google Drive

Another great example is in the SaaS market—Dropbox versus Google Drive. For years, Dropbox was the market leader, with Google Drive arriving a little late to the party. But as Google Drive grew, they matched Dropbox's pricing model almost exactly, but with one advantage—extra free storage.

Dropbox had to quickly respond, offering more flexible plans and focusing on added features like “Smart Sync” and enhanced collaboration tools. If they had only matched Google’s price, they’d have been in a race they couldn't win. Instead, they shifted to value differentiation.

3. Fast-Fashion Retailers: Zara and H&M

Fast-fashion brands like Zara and H&M compete in a particularly brutal price-sensitive market. Their pricing moves are a delicate balance—staying competitive while also signaling value through frequent new arrivals and “limited edition” runs. They don’t just fight on price—they create a sense of urgency and trendiness, making it about the right look at the right price.

Competitive Pricing as a Compass, Not a Map

Competition-based pricing is like a compass—it points you in the right direction. It helps you make sure you’re in the same ballpark as your rivals. But it shouldn’t be your map, dictating every move you make.

Differentiation—whether in features, branding, customer service, or perceived value—should always be the end goal. You don’t want to just compete. You want to carve out your own unique space in the market where price is simply a detail, not the main story.

The trick lies in knowing when to follow the herd and when to break away. When to match, when to undercut, and when to step aside and say, “Our value speaks for itself.” In the nuanced world of pricing, every move counts. The more you understand the game, the better your chances of making the winning move.

1. What is competition-based pricing?

Competition-based pricing involves setting your prices based on the prices your competitors are charging, rather than focusing on production costs or customer value. It's a way to stay relevant in the market by aligning with competitor pricing, but it requires a strategic approach to avoid price wars.

2. When should a business consider using competition-based pricing?

Businesses should consider competition-based pricing in markets with commoditized products, when entering an existing market as a new player, or when targeting price-sensitive audiences. It helps build credibility and stay relevant in industries where price is a primary differentiator.

3. How can competition-based pricing lead to a "race to the bottom"?

When businesses focus solely on undercutting competitors, it can trigger continuous price drops, eroding profit margins across the industry. This often results in unsustainable business models, where the only winner is the customer, while all competing businesses lose financial viability.

4. What are the main benefits of competition-based pricing?

The primary benefits are speed and market relevance. By using competitor prices as benchmarks, businesses can quickly set prices that resonate with customers and appear credible. It's especially beneficial in mature markets where pricing signals trust and positioning.

5. How can I avoid a price war if I use competition-based pricing?

To avoid a price war, differentiate your offering through unique features, value-added services, or superior customer experience. Using price anchoring with multiple tiers also helps to shift the focus away from pure price comparison to perceived value.

6. How do mature industries use competition-based pricing?

Mature industries, such as airlines or telecommunications, frequently use competition-based pricing to signal value while avoiding large discrepancies with competitor offerings. The key is to balance price similarity while differentiating through additional features or customer loyalty programs.

7. How can new market entrants use competition-based pricing effectively?

New market entrants can use competition-based pricing to gain initial customer traction by offering comparable or slightly lower pricing than established players. It helps reduce the barrier to entry and allows potential customers to try the product or service without a high perceived risk.

8. What role does perceived value play in competition-based pricing?

Perceived value is crucial. Even when prices align with the competition, a product that delivers additional features, convenience, or superior customer service can command higher prices. Businesses should use competitor pricing as a benchmark but highlight their unique strengths to justify pricing.

9. How does competition-based pricing impact innovation?

Over-reliance on competition-based pricing can stifle innovation. If a company focuses solely on matching or undercutting competitors, there's less incentive to improve the product or add meaningful features. Innovation becomes secondary to price matching, which can harm long-term brand differentiation.

10. What are common pitfalls businesses face when using competition-based pricing?

Common pitfalls include ignoring product differentiation, getting trapped in a price war, and underestimating the importance of customer loyalty. To avoid these pitfalls, businesses must combine competition-based pricing with strong brand identity, superior customer service, and added value.