How we change what others think, feel, believe and do
Price your products relative to prices used by your competitors.
Start by understanding your competitors, doing an analysis of their product pricing, along with other factors such as their brand image, packaging, and so on. Do the same for your own products, contrasting what you offer against your competitors' offers.
Map quality vs price for each product (a flipchart page and some post-it notes can help here) to find the price-quality 'value' line (generally quality and price go up together) and note where you have similar quality products. Consider pricing these slightly below competitors to offer better value for similar products.
Remember that if you sell at a lower price, customers may think your product is lower quality (your competitors will encourage them to think this too).
A new entrant to a market sells a product that is slightly better than market leaders and sells at slightly less prices. They market the product as 'better, for less'.
An established company drops their prices when a new company appears, selling at a loss until the new competitor gives up and leaves the market.
A key benefit of competitive pricing is that it matches the valuation method that many customers will use. When customers decide to buy something, they will typically look at similar products and then make a final decision based on price.
There is a price-quality heuristic where people assume higher prices means higher quality (and vice versa). This may be wrong and can explain why reducing price can result in lower sales. The price-quality correlation will also be affected by customer sensitivity to these factors and other strange effects can happen. The bottom line is to get a good understanding of how each customer segment perceives both price and quality.
Your competitors will take note of your pricing and respond accordingly. Your low prices can make them give up and retreat from the market. They can also lead to a price war, where they cut prices even more.
Competitive price differentials can be very important in promotions. One way that your prices can seem cheaper is where it is common in the market to have a 'recommended price' (that may well be seldom used in practice). You can then talk about how your normal or sale price is so much cheaper than the maximum price that competitors indicate they could charge.
When there are relatively few competitors in a market, it can result in a tacit oligopoly, where prices are effectively fixed as all suppliers change their prices at about the same time and to very similar amounts. Nobody wants to start a price war and everyone wants to maximize profit, so unspoken collusion pricing benefits everyone.