Why Competitor Pricing Doesn't Have to be a Race to The Bottom

Posted by Rob Horton on July 28, 2020
Rob Horton
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How do you price a product? You look at the margin you want to make. Look at what your competitors are charging.

Take a view on where you want to sit in the market. You then combine these factors and set the price accordingly. It’s painstaking, fiddly, and takes up a lot of time you could be spending on strategic decisions. This is a job that a computer would excel at so why don’t you automate it? 


A common worry is that automating this process will set off a race to the bottom. The argument is that if your competitors are also using competitor based pricing you will both continually undercut each other. 


This pricing behaviour has nothing to do with the end consumer’s willingness to buy your product so you both end up sacrificing margin unnecessarily.


This is a fair concern. If you’re using a simple repricer it’s likely this will happen. A repricer scrapes your competitors’ prices from their online store and applies some simple business logic to set your prices. Say you want to undercut your competitors by 1%. 


A repricer will take the competitor price data and set your prices to be 1% lower. If a competitor is doing the same thing this will set off a vicious cycle with you both undercutting each other until you hit your minimum margin (if you’ve set one). This is something you very much want to avoid!


The good news is, if you’re clever about it, competitor repricing doesn’t have to be a race to the bottom. The reason for this is that only 40% of products are purely competitor driven. These are products where price is the only reason customers buy these products from you. 


You therefore have to be price competitive on these products. Unfortunately for these products you will likely end up in a price war and there isn’t much you can do about it. 


What about the other 60%?

These are products where other factors drive demand. These could be brand loyalty, advertising spend, market dominance. These are products you can happily maintain margin no matter what your competitors are doing. It’s these products that you take the hit on margin if you use a simple repricer and match your competitors prices. 


This is why at BlackCurve we view alternative data sources as so important. These data sources allow us to segment products and informs us which products are and aren’t competitor driven. We can thus ensure that we do not sacrifice margin unnecessarily!


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Topics: Competitor Pricing, Ecommerce Pricing

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