How Does Competition Impact Your Pricing Strategy?

If getting the right price level in place isn’t hard enough, one thing often lost in the discussion is the impact of the competition.  Whilst this makes sense – after all very few organisations have a monopoly – there is a fine line between paranoia and ambivalence when it comes to considering competitive forces in pricing decisions.

With that in mind, here are some insights on the impact of competition on pricing strategy.

 

What They Don’t Teach at Business School

Anyone who has gone through an MBA program is familiar with the hypothetical questions professors love to ask.  Whilst these scenarios can be a useful way to spur discussion, they are so carefully crafted as to lose any resemblance to the real world.

The market is a hyper-competitive space and the insights needed to gain a dominant position are often fleeting and iterative in nature.  As such, what they teach you in business school might not translate to the real world.

In fact, the need to base decisions on facts and not assumptions are a hallmark of leading organisations regardless of the industry.  Sure, you can never have all the data, but in the real world, you better come prepared with numbers from the market if you want management to decide.

 

Know Your Customer, Know Your Market

Data is the new oil and for retailers, this means that they need to know their customers and their market.  Whilst this can lead to a certain amount of analysis paralysis, it’s no longer enough to go on ‘gut instinct’ when it comes to pricing decisions.

As such, you need to get to know your customers.  Who are they?  What motivates them to shop with you?  Why do they choose brick-and-mortar retailers over e-commerce options?   The answers to these questions will give you the insights needed to model customer behaviours.  From there you can begin to run a series of controlled experiments which will help to further your knowledge of your customers.

But what about your competitors?  After all, they play a big role in your market.  In some cases, it might be a competitor who has a larger market share, or it could be a new entrant, like Amazon, which is disrupting how things have been done.  Either way, markets are competitive spaces and as such, you cannot ignore the impact of competition on your pricing strategy.

To start with you need to make sure that your organisation has access to the tools needed to track the market.  This includes reports from industry associations or the government on trends in revenue growth and other market dynamics.  Additionally, you will need to have access to a suite of competitive intelligence tools for insight on competitor price levels, past promotions, and even announcements about new products or services.

 

However, this is just the beginning.  Knowing your competitors also includes insights into how they will react if your company adjusts its price levels.  For example, will they move in conjunction with your move, or do they stand still?  The answer to this question could indicate that your ‘competitor’ is servicing a different niche – and as such, they might not be your competitor.

 

What Does It All Mean?

You get it, the market is a incredibly competitive and while one success will hardly move the needle, a mistake could take years to overcome.  As such, understanding the impact of competition could be the difference maker in getting your pricing strategy right.

 

Hyperbole aside, your competitors weigh heavily in just about every pricing decision made – especially in retail.  As mentioned, it might be how they will react but this is when you are being proactive.  What about reactive situations?  In this case, you are the one adjusting your prices due to a move made by your competitor.

All of this underscores the need to have a mechanism in place to track and learn from your competitors. This includes:

  1. What is the current price environment? Are competitors constantly offering discounts or is there a modicum of stability in pricing?
  2. Does one competitor own the market? If so, what moves have they made to lever their advantage?
  3. What is the price range inherent in your products or market? How did this ‘range’ come about?
  4. What are your competitor’s target market and how does this customer base overlap with your target market?

From there you need to determine which strategy works best.  Is it pure parity, discounting, premium pricing, or dynamic parity?

  • Pure parity is just what it sounds like – i.e. your prices match those of your competitors.
  • Discounting is a strategy to undercut your competitor’s prices
  • Premium pricing works best when you have a position of strength compared to the rest of the market
  • For dynamic parity, the approach is one of picking a competitor for a group of products and then aiming to maintain the current price gap – either above or below – on an ongoing basis

 

 

One common element to these strategies is the ability to continuously monitor the price movements of your competitors and then use this information for actionable insight.  These tools spell the difference between success and failure and as such have become invaluable to setting a pricing strategy which mitigates the impact of competition.

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