Competitive Pricing: Is it all it's cracked up to be?

Pricing has three major approaches. A few weeks ago, I talked about cost‑plus pricing. Today, we’re on the second one: competitive pricing. The last one in the series will be value‑driven pricing.

What’s interesting about competitive pricing is that there are actually multiple variants of it, each with its own pros, cons, and traps. And honestly, a lot of what people call competitive pricing is really something else entirely—some hybrid, some guess, some policy that isn’t cost‑plus, isn’t competitive, and definitely isn’t value‑based. It’s just… something.

At its core, true competitive pricing is simple:
“Our product is comparable in value to our competitor’s product, so our price should track theirs.”
Usually that means competitor price ± X.

A classic example is Shell Oil saying, “We produce the same thing, so on any given day our price is the competitor’s price plus four cents.” They track it constantly, and the price moves constantly.

But here’s where the first nuance shows up.

I’ve seen companies proudly claim they use competitive pricing. Then you ask, “How often do you change your prices?” and they say, “Oh, once a year… maybe every other year.” Then you ask, “How often do your competitors change their prices?” and the answer is, “All the time.”

Well, that’s not competitive pricing.
That’s competitive pricing from two years ago. And two‑year‑old competitor prices are not today’s competitor prices. Their product may have changed. Their value may have changed. The market may have shifted entirely.

If you’re not updating your price at the same cadence your competitors update theirs, you’re not doing competitive pricing. You’re doing nostalgia.

So, the essentials of a real competitive pricing model are:

1. Know your product.
2. Know your competitor’s product.
   And confirm they are actually comparable in value.
3. Have a standard for how often you update your price.
4. Have a standard for how your price relates to theirs.
   (Competitor price + X? Competitor price – X?)
   And stick to it.

A Dangerous Offshoot: Customer‑Driven Pricing

I want to dispel a myth I hear all the time. People think they’re doing competitive pricing, but what they’re actually doing is something I’d call customer‑driven pricing—and it’s dangerous.

Customer‑driven pricing happens when the authority to set price is handed over to sales or product managers with the instruction:
“Go negotiate with the customer.”

What comes back is predictable:
“In order to win this deal, we had to discount because of the competitor’s price.”

But here’s the problem:
The customer never shares the full details of the competitor’s offer.
They never share the full product spec.
They may have lowballed the competitor.
And now we’re matching a lowball price with a high‑quality product.

That’s not competitive pricing.
That’s pricing naïveté.

In practice, customer‑driven pricing leads to:

• Misuse of price to hit short‑term sales goals
• Erosion of perceived value
• Long‑term profitability damage
• A nearly impossible uphill battle when you try to raise prices later

Sales teams are talented and essential, but it’s too easy for them to slip into pricing at whatever the buyer is willing to pay rather than what the product is actually worth.

The job of sales and marketing is not to process orders at whatever price comes in.
Their job is to raise the customer’s willingness to pay to match the product’s true value.
If they can do that, fantastic.
If they can’t, we need to rethink the team.

The Purest Form of Competitive Pricing

Because I studied economics, I can’t help but bring up the truest form of competitive pricing: the market sets the price.

This only exists in very specific markets where the product is truly identical.

And for pricers, the word commodity should almost be a curse word—unless you’re actually in grains, metals, or energy. Corn is corn. Wheat is wheat. Oil is oil. It doesn’t matter who produces it; the product is identical.

Commodities are bought and sold by weight or volume because they are exactly the same. You can’t charge less than the market price or you’ll get arbitraged instantly. That’s a purely competitive market.

Most products are not commodities.
Most products have differentiation, nuance, and value that must be accounted for.

This is why blindly pricing “competitively” is dangerous.
There is always a value component that must be considered.

Competitive Pricing Isn’t Easy

Competitive pricing requires:

• Analysts
• Market understanding
• Product understanding
• Historical price tracking
• Forecasting
• Discipline

The real work is in knowing exactly what your competitor is doing and adjusting accordingly.

And the reason I emphasize following competitor prices is because, outside of true commodity markets, there is no magical ticker symbol for your product. There’s no “price of wheat per ton” for your medical device, your software, your service, or your equipment.

Most products don’t have a public market.
Most products require judgment.

So we need to be careful—very careful—about how we use competitive pricing and what we assume it is doing for us.