When you’re competing for market share, one common tactic is to underprice your competition. However, to steer clear of the potential drawbacks of a price war, employing parity pricing is the recommended strategy. Let’s investigate parity pricing, when businesses use it, and the alternatives.
Parity pricing is a pricing strategy where you set your prices to be the same as your competitors. You do not try to underprice them. But you also don’t increase your prices based on a stronger value proposition.
Within your own business, parity pricing also means you don’t charge different prices for a product. Whether customers are in your store, on your e-commerce site, or with a third-party retailer, they are paying the same price.
There are a few different specific approaches to parity pricing. What they all share is their intended purpose to:
- Help you avoid costly price wars with your competition
- Maintain a more stable position in your market
Businesses may engage in parity pricing strategies for the sake of longevity. Sustaining your business and thriving in a dynamic, competitive market is always hard. However, parity pricing strategies offer a balanced and principled process for doing so.
Customer relationships are the other important arm of parity pricing strategy. When implemented, parity pricing provides your customers with a unified experience.
What are the different types of parity pricing?
There are a few ways to approach parity pricing strategy. Depending on the business’s position in the market, its approach to parity pricing can come from one of several points of view.
Competitive parity pricing
Competitive parity pricing means setting prices directly in line with the competition. The goal is to enter and compete in a new market while avoiding price wars.
This approach may be taken in order to capture market share in a conservative manner. You simply charge the same rate as your competitors to ensure minimal competitiveness.
Going-rate pricing
Going-rate pricing means setting prices based on the prevailing pricing in the market. This method is applicable in a market characterized by transparency, where prices are easily observable.
Price leadership
Price leadership describes when one leading business in a market sets a price and others follow suit. The price leader sets the price based on costs and demand, which forces smaller businesses in their market to set the same price to remain competitive.
Advantages of parity pricing
There are four main advantages of parity pricing that lead businesses to adopt it:
- Maintaining competitiveness in a market by aligning prices with competitors
- Simplifying pricing decisions
- Minimizing the risk of price wars
- Minimizing customer confusion
The first benefit is the most straightforward. By aligning your prices with your competition, you are ensuring minimal profitability and level of competitiveness.
Of course, implementing parity pricing is simple as well. As a pricing strategy, it does not demand the same level of ongoing research and maintenance. This means lower overhead and streamlined pricing decisions.
This is also a very conservative pricing strategy that avoids complexity and conflict. You can remain under the radar of your competitors when you make it clear you’re not trying to undercut them. This means they are less likely to see you as a threat and to take measures to challenge you.
Last but certainly not least, parity pricing is a customer-centric strategy. To maintain the same pricing as your competitors, across all your channels, is to make a statement. You are branding yourself as a simple, honest business that does not engage in tricks or aggressive competition. This statement may resonate with specific customer segments who appreciate honesty.
Parity pricing challenges
Parity pricing is a relatively safe cost-based pricing strategy. It doesn’t carry severe, unique risks to the same extent as many other strategies. The downside of parity pricing is what it leaves on the table.
Lack of profitability
Due to the simplicity of parity pricing strategies, the price you charge may not reflect the value of your product. It is common for parity pricing to lead to a pricing decision that undervalues the products or services you are selling.
If you were to choose an alternative pricing strategy that accounts for the value customers perceive, you can easily achieve higher profits.
The other factor that limits parity pricing profitability is its lack of flexibility. You lose opportunities to capture additional value from premium offerings. You are stuck with one simple pricing point that you cannot deviate from without defeating the purpose of the strategy.
Lack of differentiation
Parity pricing strategies can result in a lack of brand differentiation for your business. With this approach, all companies offer the same pricing for very similar products. This means that you can’t take advantage of strong branding opportunities that can lead to higher prices and profits.
Parity pricing alternatives
At Simon-Kucher, we advocate for pricing strategies that align with the perceived value of a product or service. Simply matching your competitors’ prices does not maximize your profits in the short or long term.
Value-based pricing strategies provide far more opportunity for growth. Our experience has reinforced the common knowledge in pricing strategy that charging a lower price does not automatically make you more competitive.
Value-based pricing
Pricing strategies that are based on value instead of costs enable you to maximize profit. This approach requires you to identify and leverage the unique value proposition your product or service offers. Then you set prices according to what your customer segments are willing to pay.
Value drivers are specific factors of your product or service that increase its value. Each specific factor will contribute to the final price that each customer segment will pay. So, the process starts with creating or identifying your value drivers.
Value drivers can include a wide range of meaningful factors:
- Product attributes
- Features & functionality
- Overall customer experience interacting with your products and services
- Market positioning
- Time & context
- Economic value
- Social impacts
- Risk reduction
Any factor related to the above that you offer, that your competition does not, can affect customer’s price sensitivity. However, it is important to consider various customer segments in distinct ways.
Customer research
Different customer segments will have different willingness to pay and value your proposition differently. So, research is focused on identifying customer segments and charging the prices they are willing to pay. There is no one-size-fits-all option with value-based pricing.
Instead, we recommend tailoring pricing strategies to different customer segments. The primary metrics by which you differentiate customer segments are willingness to pay, preferences and buying behaviour.
Setting the best price also requires an understanding of the situation in your market, including:
- Market dynamics
- Competitors’ pricing strategies
- Customer perceptions
- Industry trends
Our team at Simon-Kucher specializes in developing pricing strategies that cater to individual business needs and market dynamics. We can help you implement appropriate pricing models to ensure that your business not only stays competitive but also achieves sustainable growth. Contact us today to make the right pricing decision for better growth.
