Sometimes all this business jargon gets very confusing, it is alright, I got you!
Competitive parity is a type of business strategy or strategic management. Strategic management is a technique for keeping the score of your business, how it is doing, where it is supposed to go and if it is going there along with making certain changes along the way. In any strategic management, it is vital to assess and understand each aspect of a business’s operations and how they interact with each other. Competitive parity is made up of two phrases, competitive (adj.) and parity (n.), which refers to meeting the business’s competition in the business world.
What Exactly Is Competitive Parity
Competitive parity is an approach that aids a company to conclude on the budget they wish to invest/spend for marketing, advertising and other promotional activities. The budget is decided at par with the budget expense of the competing companies or the industry average. This strategy can be expanded into various fields of a business. Technically, it can expand to all aspects of business like IT, finance, etc., but specifically, it is used in the perspective of promotion, advertising and marketing.
For a better understanding, the term parity means “the state or condition of being equal.” In the business sense, “parity” denotes the identical products and services offered by the business and its competitors. If a business and its competitor makes indistinguishable soda, so much so that either can be swapped out with no significant difference, they are said to have parity products.
In the viewpoint of marketing, competitive parity refers to the spending budget to stay on a similar level with the competitors of a particular brand, product or company as a whole on the branding, advertising and other marketing and promotional activities. That is, the promotional budget is apportioned on the basis of the optimal level of market competition. The method of competitive parity is adopted based on this concept.
With the help of this method, the business has neither an advantage nor a disadvantage over its peers. The company, with this method, chooses not to beat competitors using competitive budgeting, but it is done to defend the company’s competitive position and to maintain it. Because of this reason, this method is also known as defensive budgeting.
This method is important and highly effective as it prevents companies from overspending in areas where there is no requirement, instead, the companies can allot their resources in areas where they have an advantage.
Competitive Parity – Advantage And Disadvantage
Competitive parity means spending equivalent to the competitors of the business or the industry average and the products offered are an effective substitute for one another. Whereas, competitive advantage refers to spending enough to outperform the competitors. It also refers to a situation when a company offers a similar product or service as the competitor, outperforms the competitor. A Competitive Disadvantage is when the competitors outperform the business’ products and/or services.
To understand this concept a little better, let’s take an example-
An XYZ company that intends to make a deodorant of a specific fragrance as cheaply as possible.
If XYZ sells more than its competitors at a similar or lesser price, then XYZ has a competitive advantage over the competitor.
If the XYZ Company’s deodorant earns approximately the same amount, then XYZ and its competitors are at competitive parity.
Lastly, if the XYZ Company’s deodorant sells less than that of the competitor’s, then it is a case of competitive disadvantage.
Significance Of Competitive Parity
Not every business wants to outperform its competition to gain a competitive advantage. Winning is not always the best-case scenario in every situation. In reality, it is equally If not more important to understand your brand, its strengths, weaknesses and then devise a budget to spend according to these aspects. A business most likely will not succeed if the entirety of the marketing and promotion budget is spent unnecessarily.
Competitive parity helps to strategize situations where a company is winning and also where it is breaking even. This allows to diversify the product range, take risks and experiment for greater rewards.
Competitive parity is a remarkable strategy that helps a newly established company to promote its product and/or service in an industry where there are a lot of pre-existing competitors. This method is advantageous to those who are still trying to understand their market and consumer behaviour.
It is also efficient and effective when a company does not want to spend unnecessarily on promotion in case the customers do not even notice. Matching the marketing strategy and the budget of the competitors and the industry is the best option during such cases.
This is often carried out for products or services that are not the star lead of a company’s product line. Competitive parity is an optimum and safe strategy for such products that are not the flagship of a company’s diverse product range since it keeps the product in the market and the remembrance of the customer but it helps to not spend too much money on its promotion.
Advantage Of Competitive Parity
- NAÏVE BUSINESSES- In case the business is not well versed in the workings of the industry and what needs to be done in order to succeed in the market, this strategy can work as a safe bet for the business.
- PREVENT OVERSPENDING- This method invalidates overspending by helping to calculate the optimum budget for advertising and promotional activities that is not too far away from the competitors’ or the industry at large. Through this, not only the expenditure but also the visibility and the exposure of the brand to the potential customers also match that of the competitors. This means there will be less overall spending of the budget.
- ALWAYS IN REMEMBRANCE- This strategy keeps the product in the market and the consideration set of the customers always and is an effective strategy for the business. In the case of spending too little money, it might get lost in the market, whereas if too much money is spent, it can lead to facing losses. Competitive parity keeps the balance and provides returns.
- INDIRECT BENEFITS- The pricing decision made by competitors might help a brand. If a brand raises the price of its product, it will be replaced by a similar product from another brand, increasing the sale of the brand with the lower price.
- NO NEED TO FORECAST- Many firms use sales predictions and demand forecasts to foresee how much money they should spend on branding and advertising in the future, but this method is quite straightforward and eliminates the need for intricate forecasting methodologies. As a result, competitors’ large adjustments in advertising spending can be simply imitated because the necessary expenditure is easy to compute. Using the competitive parity method is rather easy and cheap or at the very least, less expensive. All the business needs to do is, predict the major expenditure by their competitors which is fairly easy to calculate and apply to their own business.
Disadvantage Of Competitive Parity
- The benefits described above do not apply to every company; they may be beneficial to one company but not at all to another. It also depends on the brand’s financial situation and competitive stance. This method will not work for a company with a limited advertising budget.
- This strategy will never give you a competitive advantage in the market because it is based on copying a competitor who may be the market leader, which buyers will notice.
- The biggest downside of the competitive parity strategy is that you will not be able to define your product goal in the same way as your competitors. It’s possible that their purpose is to raise brand awareness. Your goal can be to sell more items in a short amount of time. As a result, when using the competitive parity budgeting method, we may make the mistake of emulating competitors’ budgets.
- Competitive parity may result in erroneous budget allocations for a few goods where a clear need for more or less investment exists.
- It is quite difficult for new entrants into the market to follow the plan because it necessitates a large budget. They must pay an enormous opportunity cost, and if they are unable to match the rival, they will perish as a result. As a result, it is not recommended for new players in the market to use the competitive parity budgeting strategy until the market is at a nascent stage and the market is relatively young. Instead, individuals can concentrate on gaining a competitive advantage in order to improve their chances of surviving.
- Another common blunder made by firms is spending excessive amounts of money on products that are unique and not fully competitive. Two companies may have similar items, but they may also have things that aren’t comparable. However, as the rivalry becomes more severe, corporations lose sight of this and continue to increase their spending on branding and advertising even when it is not necessary.
- One issue with this strategy is that it not only assumes that all competitors’ marketing objectives are the same, but it also puts an advertiser at risk of making the same mistakes as the competition. Furthermore, information on competitive-advertising expenditures is only available after the money has been spent; as a result, the advertiser who utilizes this strategy is always working off the outcomes of other companies.
- When we look at brands, we can see that they tend to spend a lot of money on promoting things that aren’t particularly competitive or unique. However, amid the competition, businesses tend to lose sight of the fundamental premise and continue to increase their promotional expenses. For example, in the case of Uber and Lyft, they are competing in a highly competitive market and increasing their marketing costs to obtain as much advertising space as possible, whether online, on billboards, or television. If we look at the internet advertising sector, both are vying for the same audience and flooding their ads to customers in order to overcome one another, but they are also spending a lot of money in the process. The internet is brimming with marketing strategies and approaches to entice customers.
Ways In Which Competitive Parity Is Applied
Competitive parity can be applied in a variety of ways-
One of such applications is for best practices. That is, for a specific circumstance, a best practice is the most well-known approach, process, or procedure. Typically, industrial organisations, government bodies, or a professional body of knowledge pitch them. When a company has no interest in improving a business function and merely wants reasonable results at a reasonable cost, it often follows best practices. A space exploration corporation, for example, may have no interest in investing in areas like human resources.
Another usage is for standards. Standards are vocabulary, concepts, methodologies, processes, and practices that are defined by a consensus process. The word suggests that experts on a subject are involved, such as well-known consultants who claim to know best practices from their experience working for a variety of companies. Best practices are frequently collected by third parties, such as corporate leaders and academics. Standards are frequently effective in developing skills that are comparable and consistent across multiple businesses. For example, it is beneficial for businesses to adhere to the same accounting standards so that investors may compare their results.
Strategy is a way how companies apply competitive parity. A strategy aimed at imitating a competitor rather than leading an industry. For example, an IT firm that closely replicates competitors’ goods and services without any hope of outperforming them to gain a competitive advantage.
Outsourced, which is another application, functions, in general, cannot provide a competitive advantage because the partner often provides the same services to a large number of companies. A real estate agency, for example, may outsource its IT activities if they are not considered critical to its core company.
Competitive parity when applied in an out-of-the-box way is through the acquisition of capital and services that are not tailored in order to gain a competitive edge. Consider a sales team that makes use of a widely utilized sales automation service in its industry.
When spending, the competitive parity is applied. Companies can compare their advertising, information technology, and human resources spending to the competition. In many circumstances, the company aims to achieve spending parity rather than lower or higher spending. For example, a brand with a large market share and strong brand recognition would try to match a close competitor’s advertising budget. This is done because a company’s brand awareness cannot be improved beyond the point when practically the whole market recognizes it. As a result, all the brand has to do now is defend its position by spending as much as the most dangerous competition.
Examples Of Competitive Parity
Companies like Amazon and Flipkart usually are seen competing against each other in case of advertising and other promotional activities. This makes them match their spending on branding, advertising, etc.
There have been countless instances where one company’s first-page advertisement in a newspaper was immediately followed by another company’s front page advertisement. This can also be noticed in television commercials, particularly during the holiday season, when e-commerce websites see an increase in sales.
Competitive parity happens during leading T.V. commercials. These channels are bombarded with the advertisements of competing companies. Each company is trying to match up and overtake the competitors in visibility to customers.
Many FMCG products can be classified as competitive parity items. It is extremely difficult to adjust market pricing. If we consider the FMCG war between Coca-Cola and Pepsi, whatever new market that Coke or Pepsi wants to establish itself in, these brands look for the existence of their competitors. As a result, they set aside money for advertising and promotion. For another example, let’s imagine ABC and XYZ are two CPG or FMCG companies that sell soaps. The leader is ABC, and the follower is XYZ. If ABC spends $10,000 per month promoting their flagship soap on a certain station, XYZ will aim to match it with a comparable budget for its competitor product on the same channel.
In the smartphone sector, where several companies compete with comparable products, we see many examples of this. This is done in order to achieve a respectable market position in comparison to your competition. Samsung and Apple, for example. If one brand establishes itself in a specific technology, others will try to imitate the strategy and invest money accordingly.
Conclusion
Competitive parity is a marketing strategy that can be used by a business in a variety of areas, but more specifically in advertising, marketing, and promotional activities. Competitive parity, on the face of it, refers to being on the same level as a business’ competition. Competitive parity is a defensive tactic employed by organizations to protect their reputation, brand, and positioning without having to invest excessive amounts of money. This strategy along with this has many other advantages that make it an excellent strategy to be introduced in a business. However, it is not all positive, there are several negatives as well, and these disadvantages should be considered before adopting competitive parity.
This strategy is followed by several huge conglomerates in the industry, competing against each other, like Coke and Pepsi, Apple and Samsung, etc.
