1.3.6 The competition


    Competitive advantage – any feature of a business that allows it to compete effectively with                                    rival products as the have an ‘edge’ over competitors.]

    Competitive advantage can be gained in the following ways:

    • Lower prices will increase demand.
    • Better quality will encourage customers as well as better customer service will lead to repeat customers.
    • A unique feature which allows it to be superior to competitors and stand out.
    • Strong brand reputation will lead to brand loyalty.
    • Entering a niche market is also another way.
    • Product differentiation

    Product differentiation – designing and making the product/service so it is different from    competitors’ products.

    By differentiating a product, it seems more favourable than those from a competitor which gains them a competitive advantage over other firms.


    • Products stand out and gain attention.
    • Consumers think that the product is better/ more desirable so are willing to pay higher prices e.g. better packaging leads to artificial differentiation.
    • Higher prices can be charged so increased profit margins.
    • Product life cycle will be steady sales and reliable products.

    Adding value – creating worth or additional value to a product over its’ cost of production.

    Why is adding value important?

    • To survive financially (covering costs).
    • To differentiate the products from competitors.
    • To make a product.
    • To focus on a certain market segment.

    How do firms decide on price and output level?

    Pricing strategy – the way in which a business decides on the price of a product.

    Price and output are linked to a range of factors:

    • Type of market
    • If the product is differentiated or has competitive advantage.
    • If the economy is growing
    • Their position in the market
    • Advertising campaign
    • Adding value


    Cost plus: add a profit margin to the cost of production

    Competitive pricing: taking the market price (based off competitors)

    Premium pricing: high prices for status brands.

    Market penetration: low prices used initially to gain market share

    Stable market – pace of change is slow; market share and size are constant with little                                 variation in price.

    Dynamic market – rapid changes in demand (affected by change in income and taste. There                          are often new entrants to the market with price changes and there can be                              creative destruction.


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