In a free market, competition is the norm, not the exception, and that competition will affect how you price. When competitors lower prices or new competition enters at a lower price, it is perhaps only natural to want to beat them at their own game - but the cost of price concessions may be higher than the cost of losing a customer or two.
Effective pricing can make or break a business. Selling a well-established product at a similar price to competitors is the usual option for small retailers who want to draw customers to their businesses. Keeping customers loyal, however, often means distinguishing yourself on other factors other than price. Relying on a competitive pricing strategy may be risky if volume cannot be maintained or if costs suddenly rise.
Clearly when setting a price it makes sense to look at the price of competitive offerings – if nothing else it's an important reference point - and smaller companies tend to follow suit and react once the big players adjust their price.
So, when basing pricing decisions on how competitors are setting their price, you might follow one of the following approaches:
Below Competition Pricing – an attempt to reach objectives that require high sales levels (involves close monitoring of the market to ensure your price remains below competitors).
Above Competition Pricing – only if you are perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is higher than what competitors offer.
Parity Pricing - pricing your product at the same level competitors price their product.
However, not all selling situations allow you to have advanced knowledge of the prices offered by competitors. While the Internet has made researching competitor pricing a relatively routine exercise, this is by no means always the case.
Surely there's a better way?
Just because your competitors have reduced their prices doesn't mean it's the right decision for you. You need to be confident that discounting your goods and services (or at the very least, keeping up with the Jones's) will protect your profit - if not increase it - and that you are not just giving your margin away in price cuts. Sometimes reducing your prices can be harmful, creating the impression that your product is cheaply made as well as cheaply priced.
While it is important to tune in to what your competitors are doing, you shouldn't feel pressured to always do the same as them. Lowering your prices should be seen as a short-term tactic to boost cash flow, not a long-term strategic move.
Alternatives to competitive pricing
Instead of just focusing on your competitors' prices, assess what else they are doing as a business and see if you can offer something better. Get to know your customers and find out what is important to them besides price. You can build your relationship with existing customers by being more personable, attentive, knowledgeable and flexible. Looking after them is vital, or they will soon be targeted by your competitors.
Ten ways to stay ahead in a competitive market:
Keep abreast of your costs. Before you consider raising or lowering prices, review the costs involved in producing your goods or services. Look at everything from manufacturing and marketing to insurance and salaries. Assess if the prices you are charging will make decent margins - anything between 20–40 % above cost value is regarded as a good return.
Don't ignore the competition. Find out who’s offering similar products and services and the prices charged. Check websites, talk to suppliers. This enables you to assess if your prices are right for the market and if your products are being merchandised effectively to maximise sales
Know your customers. Are you looking for an impulse purchase or a considered choice and what does this say about your product? Are you aiming for bargain hunters or the top end of the market?
Consider a “loss leader” - a product not in itself profitable, but that draws in customers. Increased sales of pricier offerings effectively offset the loss.
Be unique. Ensure you have a unique selling point (USP) and don't hide that USP light under a bushel. The aim should be to find ways of making your product or service less price sensitive, as successful brands such as Apple have ably demonstrated.
Avoid over-discounting. Don’t throw in too many incentives or discounts; you’ll only eat into your profit and risk betraying a lack of faith in the original proposition.
Location. Varying prices according to where your products are available is a tactic used by convenience stores. Customers are prepared to pay more if the shop is on their way home or is over the road from where they live.
Target your market. Consider adapting products to suit the needs of particular customer groups. This might involve offering economy, standard and premium versions. This market segmentation approach can build loyalty and see customers progress to higher price points as their circumstances and needs change. Offer a free warranty or after-care service to differentiate yourself from the competition.
The cost of credibility. Consider offering joint promotions and share publicity with businesses/charities you’d like to be associated with. Respect can pay dividends.
Allow different ways to pay. Sometimes, the method of payment is as critical as being competitively priced. Offering agreed time periods in which to settle a balance is one way to incentivise purchases, particularly on high cost items. Allowing payments to be made online or by telephone are standard options any business should offer.
How to avoid discounting to stay competitive
Just because a rival has slashed their prices doesn’t mean that you should follow suit. Analyse why a competitor has lowered their prices. Are they new to the market and trying to distinguish themselves by offering the cheapest product or service? Are they launching a new value range because this is what the market wants, or have they been forced to slash prices to try and boost dwindling sales?
Before lowering your prices you need to be confident that discounting will at the very least protect your profit, if not increase it, and that you are not just giving your margin away in price cuts. In some cases, it might even be more profitable to sell fewer products at a higher, sustained price than to sell more at lower prices.
If discounting is inevitable, start with minor cuts and see if that makes a difference to sales. Lowering your prices should be seen as a short-term tactic to boost cash flow, not a long-term strategic move.
You don’t have to win a price war but you do have to survive it. In the event of increased competition on prices it means you need to differentiate your products and segment your customers.
When it comes to price wars, think hard. Who in your industry could start one? How could you survive it? How could you win it? Since you never know what your competitors are thinking, always remain vigilant controlling your costs and doing the best you can at segmenting the market, portfolio pricing, and at differentiating your products.