Influenced by the potential to quickly attract customers willing to try something new, he chose to compete on price. But as he undercuts competitors, he must have a plan to cover his costs. During a meeting with Paula, two possible strategies emerged: cost-based pricing and competition-based pricing.

Cost-based pricing, where a fixed margin would be applied to operating costs, would be simple and easy to implement. Paula likes this approach because she also simplifies the task of forecasting ROI. But if competitors match your price, you can only remain the cheapest on the block by cutting costs, which puts operational or product quality at risk. An alternative is to use a form of competition-based pricing. For example, you might be the only ice cream shop in the area that consistently offers discounts. Known as a differential pricing strategy, this approach would give you the flexibility to ensure your costs are adequately covered. The problem is that consumers may make purchases only when discounts are in effect, cutting into their profits.

What is the best way to implement price competition?

Cost-based pricing

Pricing based on competition