Competition Driven Pricing

Competition driven pricing is one method that companies should give up if they plan on establishing price level based on a more strategic vision rather than the current one, which is mostly about tactics. Competition driven pricing is realized by excessive growth of the important that the market share has in the life of a company and everything starts from the assumption that profit and market share are strictly related. Behind this excessive importance given to market share is the psychological motivation that managers have: the desire for power. Competition driven pricing is not completely wrong. Prices need to be lowered when they don't justify the value delivered compared to the relation between value and price given by rival products. Price discounts are the most efficient way to achieve sales objectives but they are also weak decisions from a financial point of view.



This happen because competition can easily align to the new product level and temporary price discounts lead to short term profits and a low profit on a longer term. Price discounts are recommended only if competitive companies are not able to do the same thing and are incapable of lowering prices at a certain period of time. The goal of strategic pricing is to find a combination between profit margin and market share, a combination which can maximize long term profit. With this sort of optimization, it is easier for us to understand how long term profit can be achieved even if your market share is not the greatest (for example: companies which produce premium products). Strategic price needs to be guided by 3 main principles:

- Value based

- Proactive based

- Profit driven.



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