Pricing Strategies: Pricing Elasticity and Competitive Pricing

Pricing is one of the most powerful levers a product manager controls. It directly affects revenue, customer perception, and competitive positioning. Understanding how customers respond to price changes — the concept of pricing elasticity — is essential to setting prices that maximize value for both users and the business.

Competitive pricing strategies are common but often misunderstood. Pricing at or near competitors is not about blindly matching prices. It requires a nuanced understanding of your product’s unique value, cost structure, and market segment.

This lesson unpacks pricing elasticity and competitive pricing with real examples and tactical advice to help you make smarter pricing decisions.

Pricing elasticity reveals how sensitive your customers are to price changes

Pricing elasticity measures the percentage change in quantity demanded relative to a percentage change in price. It is always a negative number because price and demand move in opposite directions.

• Elastic product: Small price changes lead to large changes in demand.
• Inelastic product: Price changes have little effect on demand.

Here is a concrete example to illustrate:

In this example:

• Product A’s price drop from $10 to $8 increases demand from 1000 to 1200 units, but revenue decreases by $400 due to the high elasticity (-1).
• Product B’s price increase from $10 to $15 reduces demand from 2000 to 1500 units, but revenue increases by $2,500 because demand is less sensitive (-0.5).
• Product C’s price increase has no effect on demand, indicating it is perfectly inelastic.

The actual job is to understand the elasticity of your product and choose pricing that maximizes revenue or strategic goals. For example, if your product is elastic, lowering prices might grow your user base but reduce revenue. If inelastic, you can raise prices without losing customers.

Competitive pricing uses competitors’ prices as a baseline, not a rule

Competitive pricing strategies revolve around setting your product’s price relative to your competitors. The core idea is to use competitor prices as a reference point, but your actual price should reflect your unique value proposition and cost structure.

There are three main approaches:

1. Pricing at par with competitors

You set your price close to competitors to avoid price wars and signal similar value. This is common in commoditized markets.

To succeed here, you differentiate on non-price factors:

• Quality of production
• Better customer service
• Creative marketing and branding

For instance, a maker of handcrafted leather shoes does not compete on price with mass producers. Competing on price would be unprofitable due to higher production costs. Instead, the competition is other handcrafted shoe makers who justify higher prices through quality and craftsmanship.

2. Pricing above competitors

You price higher to signal premium value. This requires a clear non-price advantage that customers recognize and are willing to pay for.

Example: Amazon Prime charges more than Walmart’s membership, justified by faster delivery, exclusive content, and other value-added services.

The key to success is proving the premium price is justified through superior benefits.

3. Pricing below competitors

This is a penetration strategy to gain market share quickly by offering lower prices and sacrificing margins.

It works well if your target segment is price sensitive and you can control costs through economies of scale.

For example, Coke priced slightly lower than Pepsi in a price-sensitive market can attract more customers.

However, a major drawback is that customers get used to low prices, making it hard to raise prices later. Retailers like K-mart failed when trying to reposition themselves after years of discount pricing.

The trap is treating competitive pricing as “match the price” without a strategic narrative

Price is a powerful communication tool. It tells the market who your product is for and what value it delivers. Blindly matching or beating competitor prices without understanding your own cost and value structure can erode margins and brand positioning.

What I tell PMs is: competitive pricing must be paired with a clear story about why your price is where it is. That story could be “best value for money,” “premium quality,” or “affordable option.” Without that, price is just a number.

Pricing decisions must align with your product’s value and market dynamics

Pricing is not static. It changes with market conditions, customer preferences, and competitive moves.

Advanced pricing strategies integrate:

• Cost analysis: Understand your cost base deeply, including fixed and variable costs.
• Value perception: Research how much customers value your product’s features and benefits.
• Market structure: Monopoly, oligopoly, or competitive markets require different pricing tactics.
• Competitive intelligence: Monitor competitor prices and offerings continuously.

For example, telecom companies in oligopolistic markets like India price strategically to attract price-sensitive customers while maintaining profitability. A ₹400 plan with ₹350 competitor pricing plus added benefits can disrupt the market.

Field Exercise: Analyze your product’s pricing elasticity and competitive position (20 min)

1. Pick one product or product tier you manage.
2. Collect historical sales and pricing data for the last 3-6 months.
3. Calculate the pricing elasticity: % change in quantity demanded / % change in price.
4. Classify the product as elastic or inelastic.
5. Identify your main competitors and their prices for similar offerings.
6. Map your price relative to competitors: below, at par, or above.
7. Write a brief narrative explaining your pricing position:
   • Why is your price set here?
   • What non-price factors justify this position?
   • What risks do you see if you change your price?

This exercise will sharpen your ability to ground pricing decisions in data and strategy.

Pricing above competition requires a clear value proposition customers recognize

When you price above competitors, you must have a compelling non-price advantage. Customers must believe your product justifies the premium.

This advantage could be:

• Superior quality or craftsmanship
• Enhanced customer service
• Unique features or technology
• Brand prestige

For example, Amazon Prime charges more than Walmart’s membership but offers exclusive services like fast delivery and Prime Video.

The risk is that if your premium claims are not credible, customers will defect to cheaper alternatives.

Pricing below competition can dominate price-sensitive segments but has long-term risks

Pricing below competitors is a volume and market-share play. It is effective when:

• The segment is highly price sensitive
• You can reduce costs through scale or operational efficiency
• You accept lower margins initially to build a customer base

Indian examples include discount brands and value-focused FMCG products.

However, customers accustomed to low prices resist price increases later, making repositioning difficult.

Retail chains like K-mart failed to move from discount pricing to premium apparel because customers rejected higher prices.

From the Field: Pricing insights from Indian startups

In every Pragmatic Leaders cohort, I see teams struggle between competing on price and competing on value.

One fintech startup I worked with initially tried to match the incumbents’ pricing. They quickly realized that their technology and user experience were superior, so they raised prices modestly and invested in marketing those advantages. Their customer acquisition costs stabilized, and retention improved.

Another example is a D2C brand that priced aggressively low to gain market share but struggled to raise prices later. They ended up stuck in a margin trap, unable to fund growth.

The pattern is consistent: Pricing is a strategic narrative, not a tactical reaction.

Where to go next

• If you want to master the art of pricing with user value: Value-Based Pricing Strategies
• If you want to build pricing experiments and learn fast: Pricing Experimentation and A/B Testing
• If you want to understand financial trade-offs in product decisions: Financial Modeling for PMs
• If you want to study competitor analysis in depth: Competitive Analysis Techniques