When using the competitive parity method of budgeting, the firm

Competitive parity is an interesting concept to study in Marketing. Let us first examine what competitive parity is and then move on to see what are its advantages and disadvantages.

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Advantages for competitors
Let us now have a look at the disadvantages
Thank you for reading our article about competitive business advantage.
Key Advantages of Competitive Parity:
Disadvantages of Competitive Parity:

Though the context of competitive parity might not be clear from its term, its crux and concept is. Competitive parity on the face of it means being on par with competition.

Definition

In the area of marketing, competitives parity refers to the optimal expenditure needed on branding and advertising activities to stay on par with the competitors of a particular brand, product or company as a whole. Promotional budget is allocated based on the scrutiny of optimal level of market competition.

If we take the example of the FMCG war between Coca Cola and Pepsi, any new territory that Coke or Pepsi tries to establish itself in, these brands check the competitor’s presence. Accordingly, they budget their advertising and promotional expenses.

Competitives parity is a defensive strategy that is used by businesses to defend their reputation, their brand and its positioning without resorting to the overspending of financial resources.

Now that we have understood what competitives parity is and what its role is in marketing, let us go further to see the merits and demerits of this strategy.

Advantages for competitors

One of the key advantages of using this method to calculate the advertising and branding expenditure is that a business will not be too far away from competitors. The spending will match that of the competitors and the visibility of the brand and its exposure to potential customers will match that of the competitors. This means that the brand is not overspending much.

Many companies use sales forecasts and demand forecasts to predict what their spend on branding and advertising activities should be for future periods, but this method is relatively simple and does away with complicated forecasting methods. Due to this drastic changes in the advertising expenses, if made by competitors, can be easily replicated because it is easy to calculate the necessary expenditure.

The above stated advantages needn’t always be advantageous for the company. As stand alone points they are definitely advantageous but can vary from situation to situation. For a company that is not doing so well financially, this kind of advertising and branding budgeting may not bode well.

Let us now have a look at the disadvantages

For new players in the market, following this kind of a model might prove disastrous. They will have to bear huge opportunity costs to be able to match up to the advertising and branding budgets of existing big players in the market. This might prove detrimental to their financial health and lead them into huge losses. For new entrants, this kind of budgeting is not always advised unless the market in itself is very new and still in its nascent stages in which case it makes sense as all the competitors are relatively new too.

Another trap that businesses usually fall into is spending exorbitant amounts of money on products that are different in nature and not totally competitive. Two companies might have products that are competitors but they may also have products that are not competitive. But the competition gets so intense that companies forget this and keep raising their spending on branding and advertising even when it is not required.

If you follow the advertising of certain competitors closely, you will observe them competing with each other, therefore matching their spending on advertising and branding. Take the example of Flipkart, Amazon and Snapdeal.

There are numerous instances where a front page advertisement in a newspaper by one of the companies has been immediately succeeded by a front page advertisement by another one. This is also seen in the TV advertisements especially during the festive seasons which spike up sales for the e-commerce websites.

Leading TV channels are flooded with their advertisements and each one competes with the other trying to match up and overtake the competitors in visibility to customers.

Thank you for reading our article about competitive business advantage.

There are various types of strategies companies use to determine their budgeting for marketing and promotional activities. Today we will study about the definition of the Competitive parity after that we dive into the difference between competitive parity and competitive advantage then atlast we will discuss key advantages of competitive parity.

What is Competitive Parity?

It is a concept of strategy, where a company spend all the budget of marketing activities at par with our competitors or industry average. It doesn’t use competitive budgeting strategy to beat competitors. The allocation of funds on advertising and promotional activities will be totally similar to the competitors budgets. It is just done to defend the competitive position and to maintain the reputation of a brand by not spending much. That is why it is known as defensive budgeting.

This is done to achieve a decent position as compared to your competitors in the market. For example, Samsung and Apple If one brand establish itself in a particular technology, others will try to emulate the same strategy and try to allocate the budgets accordingly to make their presence in the same space.

What is Competitive Parity Budgeting Method?

In competitive parity method, we determine the advertising budget by analysing the spending done by our competitors. The main disadvantage of this method is that it may not be necessary that our objectives/goals are the same as our competitors.

COMPETITIVE PARITY V/S COMPETITIVE ADVANTAGE?

Competitive Parity refers to spending at par with your competitors, whereas in competitive advantage we spend to outperform our competitors. In competitive parity the products offered by the competitors are similar in nature and the product can be easily substituted. Many FMCG products are to be considered as the competitive parity products. It is very difficult to change the pricing in the market.

Key Advantages of Competitive Parity:

The main advantage of this strategy is to calculate the advertising and branding expenditure because it will be similar to our competitors. The spending on promotion and brand presence will be at par as planned by our competitors. The Promotion outcome and customer reach will match as of our competitor. That means there will be less overspending of budget.

Various companies are using demand forecasting method and sales forecasting methods to predict sales in the near future. Instead of using the forecasting methods, which is quite expensive and consume lots of funds, using competitive parity method is easy and less expensive. In that we have to predict the major expenditure by our competitors which is fairly easy to calculate.

Brand can be benefited from the decision taken by its competitors over pricing. If a brand has increased the price of its product, then it will get substituted by the similar product of the other brand and thus increasing the sale of brand with price advantage.

The above listed advantages are not true in each and every company case, It may be advantageous for one but not at all useful for another company. It also depends on the financial conditions and the competitive positioning of a brand. Company with less advertising budget this strategy will not suit well.

Disadvantages of Competitive Parity:

The main disadvantage of the competitive parity method, when you’re defining your product goal it will not be similar to the competitors goal. His goal may be to increase the brand awareness. Yours may be to increase the number of units sold in a period of time. So while implementing competitive parity budgeting method we may take wrong decision to emulate the budgets of competitors.

For new entrants in the market, it is very difficult to implement the strategy because it wants huge budget to be implemented. They have to bear exorbitant opportunity cost, they will not be able to match up the competitor they will get perished in the process.So it is not advised to the new players in the market to implement competitive parity budgeting method until and unless market is at a nascent stage and the market is very new in existence. Instead, they can focus on competitive advantage so as to increase the chances of survival.

If we look at the brands, they tend to spend a huge amount of money on promotion of the products which are not at all competitive and different in nature. But while competing, companies tend to forget the basic concept and keep raising their budgets on promotions.

If we look at the Uber and Lyft they are competing in the huge competitive market and raising their promotion budgets, so as to get as much advertising space as they can buy either it can be online or billboards or on Television. If we look at the advertising space online, both are competing for the same audience and flood their ads to the customers so as to overtake one another but in this process they are spending a huge chunk of money. The online spaces are filled with the marketing strategy and tactics to lure customers.

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