In free markets, competition is the norm not the exception, and that competition will limit your latitude for pricing. When competitors lower prices or new competition enters at a lower price, your gut reaction is probably to lower prices too - but the cost of giving price concessions may be higher than the cost of customer losses. Surely there's an easier and less costly way to identify the proper reaction to competitive price moves?
Competitive pricing pressure is actually a bit of a misnomer - because all pricing pressure is driven by customers rather than competitors. Your competitors’ pricing actions and behaviours are really only relevant when and if your customers and prospects deem them to be relevant.
Pricing pressures from customers
The global recession reset consumer's perceptions of value and price. Consumers have maintained a cautious outlook and are expected to continue to shop around because during the recession they were surprised to find lower costing items could also be of good quality – so they continue to focus on price rather than value. The extended economic downturn has created a tight spending environment and today's customers are squeezing every purchase for maximum savings.
Recognizing that pricing pressure is largely about customers’ perceptions, we can now get more specific about what might affect those perceptions. Some of the drivers of customer perceptions may be largely out of your control but most of them will be “fixable” to some extent.
Customer perceptions on prices
Do your customers/potential customers believe that what you and your competitors are offering is all the same and interchangeable?
Your differential value case isn’t clear or compelling enough.
Your value-adds and differentiators just aren’t that important to them.
Your targeting is inaccurate or your NPD (new product development) processes are weak.
They believe that they will do better elsewhere.
Your customer service and retention efforts are lacking.
What causes price pressure?
In the past, customers were a bit more willing to look for the inherent value of the products and services they purchased. But not any more. Today's customers are intently focused on getting the lowest price. Why?
Well, we are all now well acquainted with the "no frills" retailers who can guarantee lower prices. The internet has forever changed the way all of us shop – in the comfort of our own homes we can search for an ever-increasing array of products at rock-bottom prices. If you don't have time to find the best deal yourself, there are over three million websites that will search for and locate the lowest price for whatever it is you seek to purchase.
Branding investment is booming
Spending on marketing to increase brand equity can help improve pricing power because pricing power is based on more than just price. It's also based on the attributes, qualities and benefits of the brand.
However, it's difficult to measure return on investment for branding investment. Many companies don't understand ROI from trade promotion spending as well as they should – for instance, buy-one-get-one-free promotions reward existing customers rather than drive brand penetration.
Companies need to become smarter with marketing by focusing relentlessly on the ROI associated with this spend. Manufacturers need a crystal-clear understanding of promotional events by brand, size, event type, account and season. This means having the right systems, processes and evaluation techniques, scaled and sized appropriately to an organization's resource and capabilities.
Companies need to introduce consumers to their brands at a price point that is consistent with income levels in the local market to promote category expansion, as well as taking infrastructure and distribution capabilities into account.
What is your position?
If your firm’s offer is more attractive to customers than your competitors, then you have pricing power. That is, you may be able to maintain or increase a positive price differential between what you are offering and your competitors without losing market share due to your customers perceiving that you deliver more benefits than the competition.
If your firm’s profitability for the impacted customers is higher than the profitability which the competitor could achieve with those customers, then you have a competitive advantage. You can use that competitive advantage to either attack a competitor’s customer base or defend your own customer base with a price reduction.
What moves should you make in response to a competitive price threat?
There are four stances you should take in response to a competitive price threat depending on the individual situation. These are: Ignore, Defend, Mitigate, or Accommodate.
If you earn stronger profits in serving the impacted customers (i.e. possess a competitive advantage) and your customers perceive your offer as more attractive (i.e.possess pricing power), then you should ignore direct price competition and carry on your pricing strategy as you see fit.
If you earn stronger profits in serving the impacted customers (i.e. possess a competitive advantage) but customers do not perceive your offering as more attractive (i.e. lack pricing power), then defending your market position with a measured price reduction may be merited. The margin reduction may be less costly than the potential loss of market share.
If you do not earn stronger profits in serving the impacted customers (i.e. lack a competitive advantage) but customers do perceive your offering as more attractive (i.e. possess pricing power), then you should mitigate price competition through reiterating and re-communicating your benefits.
If you do not earn stronger profits in serving the impacted customers (i.e. lack a competitive advantage) and customers do not perceive your offering as more attractive (i.e. lack pricing power), then you will have to accommodate share and margin losses in the short term in the hope of improving your value offering for the next cycle of competitive engagement.
Downward Price Pressures
You can provide your customer with a valid reason to pay more for your products and services or you can lower your price to meet the customer's perceptions of the value of your offer. The sad news is that most salespeople lack the skills necessary to successfully overcome downward price pressures. As a result, they are forced to discount their asking price in order to get the sale.
Most sales managers are keenly aware of the fact that price discounting has a negative impact on margins. However, little thought is given to the fact that price discounting reinforces the customer's false perceptions about the value of your products and services.
What's the solution to downward price pressures?
To successfully defend higher prices, salespeople must communicate value using the same language they use to communicate price. In almost every instance, price is presented to customers in terms of pounds and pence, easily understood and easily compared to other prices. However, when it comes to communicating value, salespeople often rely on terms like dependable, longer-lasting, durable, cost-effective and fuel-efficient. This difference in language makes it very difficult for customers to determine if the value they are going to receive exceeds the price they are being asked to pay. As a result, customers focus on the one thing they have been conditioned to focus on – price. To successfully overcome downward price pressures, salespeople must learn to communicate value in terms of pounds and pence.
Pounds and pence value is delivered to customers by helping them improve their performance, reduce their costs and/or by reducing their exposure to risk and liability - in a measurable way. Your salespeople need to know how to calculate and communicate this value to customers using the language of money.
Can you help your customers improve productivity? If you can, what is the pounds and pence savings they will realize as a result of better labour, equipment and material utilization?
Can you help them reduce costs? If you can, what is the pounds and pence savings they will realize as a result of reduced material, energy and fuel consumption?
Can you make their work environment healthier and/or safer? If you can, what are the pounds and pence savings they will realize as a result of fewer accidents and injuries?
In real life, you don’t always have pricing power and/or a competitive advantage, and you can’t win every customer profitably every time. But, you should always be able to live to fight another day. Pricing pressures are unlikely to diminish but by learning how to calculate value in terms of money your salespeople will be prepared for the opportunity to respond the next time a customer says, "your price is too high."