Competitive Pricing

Cost-Based Pricing

One bag of your cookies (7 oz) costs $3.00 to make. Let’s say you want a 40% profit margin. That means the sale price of your cookies would be:

That’s a price of $0.71 per ounce.

So, you should just price your bags of cookies at roughly $5.00 per bag, right?

Well, you could. But, in a dense market like cookies, it may be worth taking a look at your competitors.

Competitive Pricing

Let’s say you’re trying to compete with Tate’s Bake Shop, one of the major “specialty” brands that makes higher-end cookies like your own company. Tate’s also makes 7 oz bags, but each of their bags costs $6.00.

That’s a price of roughly $0.86 per ounce.

If you were to sell at $5.00 per bag, you would be significantly undercutting them, but consumers may stop seeing you as a competitor to Tate’s and instead perceive your brand to be of lesser quality. You’ve spent all this time crafting a high-end brand message… Why lose it by being compared to cheaper, worse brands?

After doing some more competitor analysis, you realize that companies similar to yours are selling at roughly the same price per ounce as Tate’s Bake Shop. Now you have an opportunity to raise your prices to match your competitors.

Let’s say you decide to undercut Tate’s Bake Shop by a little bit and sell your cookies at $0.80 per ounce. For a 7 oz bag, that equates to $5.60.

Your cookies still cost $3.00 to produce. But now, your profit margins are higher.

By raising your prices, you’ve not only improved consumer perceptions of your brand to match the quality of your product, but you’ve significantly increased your profit per bag.

That said, no pricing model is 100% foolproof, and this may not be the right choice for your brand right now. Here are a few things to be aware of when choosing to use the competitive pricing model:

Your model may be inaccurate

You might not be comparing yourself to the right companies. Let’s go back to the cookie example. Maybe you think your cookies are competitors to Tate’s Bake Shop, but it’s possible that you and Tate’s appeal to entirely different customer bases. Perhaps they’re lower calorie than your cookies and appeal to people concerned with their weight.

Alternatively, Tate’s may be targeting an older demographic who likes crispier cookies over soft, gooey ones like your own. Not acknowledging these differences leads to an inaccurate model and, as a result, inaccurate results.

You may be missing out on profits

Maybe your cookies are better than Tate’s Bake Shop’s cookies, and you shouldn’t even be competing with them. Unless you know that your cookies are exactly the same quality as your competitors, you can never fully be sure that you’re not underselling your product.

That said, maybe you went the other way around and overestimated how luxurious your cookies are. By setting your price too high to match those of unrealistic competitors, you could be losing sales.

You might not stand out from the crowd

Let’s say you land at a retailer that sells Tate’s Bake Shop products as well as 10 other higher-end cookie companies. If you’re all in roughly the same price bracket, why would someone choose your cookies over more recognizable brands? In this case, having a significant price cut can play to your benefit, decreasing your profit margins overall, but increasing total sales.