Episode #0036 - Is competitor based pricing sensible?

It of courses seems to make sense - that you should check on what your competitors are charging - and base your pricing somehow on that metric.

However - can there be drawbacks in this approach and if so what may they be?

Just because someone is a competitor - does it mean you should charge the same. Should a convenient late night corner store - price match against an out of town hyper market?

 

Today, I want to talk about a different form of pricing. We talked about value pricing before and what it means and cost-plus pricing. But we haven't covered competitive pricing, I think that's an important one. Because what we've noticed especially in our consulting is looking at price points just generally in life, is that a lot of businesses are very very keen on wanting to know their competitive pricing. It’s almost like this fixation with setting prices by knowing what someone else is pricing. We just wanted to look into that, and see whether that's a good approach. Look at the pros and the cons. 

We’re seeing it even in job descriptions and in pricing departments, we're seeing more and more web scraping. IT software is being written to go out and look through all these different competitor websites and compare the prices and match to the market. All this stuff is almost as if it's the only way to do things. First of all, that's quite good technology. It's good to know these sorts of things and of course, there's a lot of shopping around the software now. If people are trying to buy on the internet, price comparison websites are prevalent in nearly all industries. Certainly from hotels to insurance markets. But let's dig into this a bit more and look at it from a probably a brick and mortar perspective a bit more. 

What is it? I mean, you'll hear so many different terms bonded around competitive pricing, match to market, and market-based pricing. They’ll have subtle differences but let's just go through very quickly what those are. In a nutshell, I suppose competitive based pricing is thinking about your pricing in relation to other people's prices. What people do like Aiden just mentioned, a lot of companies now web scrape if they can. Then just then line up all their competitors' pricing for a particular item, or product. Then they go, this person's five, that person is like seven, we're gonna then set this price for this product around here. It could be in the middle, it could be slightly above, whatever. But that's essentially competitive pricing and that's what all sorts of systems do.

This makes a lot of sense in the Internet era, or when you're reselling a product. When you're reselling a branded product whether that is a watch, a bottle of perfume. Those sorts of things that customers know that they're getting the item that is the same. And they can compare and contrast with different providers. Let's say, for example, supermarket chains if they're based in a large hypermarket store on the edge of town. And their competitor is also based in a large hypermarket location on the edge of town. It does make a lot of sense for them to be tracking what the competitor is selling it at. At the end of the day, you can't be a little bit up, or a little bit down but within a bandwidth. If you're selling it at two to three times the price, the educated customer is not going to come to your store or your website.

I think another example there would be petrol stations, you can get two on the same street one across the road from each other. So having one like pricing way up from the other one, people will notice. So, having that sort of competitive understanding when you're setting prices in petrol stations makes sense.  That would be called a micro-segmentation strategy as well, which we touched on before. I suppose the other sort of different approach would be market-based pricing. And essentially, what people do there is looking at supply and demand dynamics. What it costs to make and the demand for that certain time. A petrol fuels industry would use that type of pricing, you can price high if you've got a new product. Then, over time, as you get to know the market, you can gradually bring the price down. That's a form of pricing strategy that people use there. And then you can gradually bring it up again based on demand and supply.

What I'm going to say here is a couple of concepts to keep in mind. The first one is the bandwidth, you can charge more or less within a certain bandwidth. How big is that bandwidth? It depends. It is important to bear in mind that no product or service is ever the same. Nothing is ever the same because of customer service, because of the exact location. And because of potential payment plans credit cards you can use in that store. The example of a petrol station, one petrol station cleaner than the other one when you go inside. You can collect point miles with them. I'll give you an example, nearly every petrol station there will be a price difference even just a little down the road. We're used to seeing that which is a mark to market environment or, competitive pricing environment doesn't make a huge amount of sense. The other one, I'd point out is, even if you're selling the same item, convenience is a massive thing. So, who are you comparing your pricing against? The example I'll give is, let's take a corner store convenient to your house. You have a late-night emergency or something like that. You need to go out and pick up a bottle of milk, or kids diapers, whatever it is. And you just want to pop out the door, run to the shop and buy that item. Is it a Corner Store, are they comparing themselves to a hypermarket half an hour away that sells the same item but half the price? It wouldn't be very sensible if they were. Because the bandwidth in that instance could be hugely different. What you're seeking to buy is convenience. The solution to your problem is that it's not worth you jumping in the car and driving for half an hour. Bandwidth is something known about but the size of the bandwidth. And who you're comparing against those are the important things.

Thinking about this, when you track your pricing against somebody else's. You're sort of making an assumption that your business model, your cost of operations, and your way of doing business is the same. No two businesses are the same even if you're selling the same stuff, you're doing it differently. Operations are different. Your cost base is different. Your customer base could be different, and they’re willing to pay. So you’re making a whole load of sweeping assumptions by literally bringing your price close to theirs when you do that. So I think it's important to know that when you're using competitive based pricing you are in a way capping your revenue potential. We said that before when we discuss cost plus you're anchoring people, even your organisation to cost when you're using cost-plus. Equally, when you're using competitive base pricing, you're anchoring your total economic value to your competitors and it could be greater. Therefore, you're reducing your pricing power. It becomes a very confusing market when everybody's following everybody else, who is the price leader? Why are they the leader? Should they be the leader? Is everybody second-guessing each other and everyone’s just following you? Who knows? It just becomes quite a confusing game and this is why we need a pricing strategy. You need to know your value so you can with confidence go out in the market and rightfully, set your price positioning the market based on one value. I'm not dismissing your competitors' price point, competitive activity and tension are important to note down. But what I'm saying is costs and competition are just two of the inputs in setting a price. And the value of your business to the market and your customers will give you more pricing power.

I agree with that, I think, fundamentally, one of the roles of pricing departments should be to increase that bandwidth size, the bandwidth we have spoken about. Make it as big as possible, offer as much value as possible to the customers. Educate the customers as much about your specific value. Educate them about your reliability, your convenience, your trade agreement terms, your payment terms. The pleasantness and the friendliness of being in-store and any offer sales pushed that aspect. At the end of the day, there's a real value people know about these things to put that value on them. So, the better you do, the better your customer service even selling commoditised items. Let's say an example of a watch or any item like that, the better you sell, the more value you invest in your sales team, your marketing, your opening hours. And whatever it possibly could be that will serve to increase the bandwidth that you could sell up and down versus your competitors. 

To sum up, competitive pricing is the next step in the evolution of the pricing journey. You move from cost plus, now you're looking outward to the market, to your competitors. But at the same point, it's still quite a tactical pricing game that you're playing if you just stop there. It indicates to others that there isn't a strategy and perhaps that you are disconnected from your customers. Therefore, relying on other benchmarks like competitive benchmarks, indexing and things like that. You're also reducing your pricing power by going out oh they’re seven, the other ones are five. We're gonna be somewhere in the middle when potentially. You've got so much more to offer, what you're doing by that is underselling your offer.

My final point would be, say you're competing in a market against one competitor. What if your competitor is just making crazy decisions? What happens if they're driving their business into the ground? You should certainly not try to replicate that or try to compete with them, a race to the bottom will destroy you both. So, just because someone else is doing something. There is this concept of intelligence in which crowds of people make the right decisions. I'd also argue that crowds of people make the wrong decisions so you'd have to think through, why are you making that decision? At the end of the day, everything is down on your own, what you do.

I agree with that. When you start looking to others for everything, it becomes quite cheap. You don't have that 360 view on the market, you're just always faced with the immediate. And everything becomes a sort of firefighting. We've heard our competitors have just raised their price and everyone goes rushing to either raise them higher than that or lower than that. That's the small end of town, you've got to think bigger than that. Have a broader view and a game plan that is a little bit more than that just day to day sort of tactics and reactive pricing. And that in itself will give you so much more confidence when your competitors do raise prices or they launch new products you'll have a game plan in mind. And that will give the whole pricing department so much confidence which in turn will feed into the sales teams, and the tactics and guidance you give them as well.