Ever noticed how some brands price their products high and yet stay in business while some sell at low prices and still manage to make maximum profits? We are going to let you in on a business secret: Product pricing is not akin to taking a shot in the dark, it is calculable.
The price of a product is influenced by a variety of factors including the respective brand’s revenue goals. In the words of Katie Paine from the News group, “The moment you make a mistake in pricing, you’re eating into your reputation or your profits.”
A brand’s pricing strategy symbolizes its value and instills consumer confidence in its offerings. It helps optimize sales and can make or break your business. A recent study by Deloitte also shows that pricing solutions can immediately boost business performance by 2-4% and sales growth by 1-2%.
Notably, there are different kinds of pricing strategies, and choosing the right one for your business makes all the difference. This article presents a fundamental overview of pricing strategies with a particular focus on competitive pricing.
First Things First: What Is a Pricing Strategy?
The method employed to figure out the best price for a brand’s offerings is known as the pricing strategy or pricing model. Ideally, a pricing strategy should take consumer demand and market demand into consideration. It should be effective in maximizing business profits and shareholder revenues. Pricing strategies are broadly classified into seven types:
Of these, competitive pricing is one of the most popular pricing models and is widely used across different industries.
Competitive pricing is the process of choosing strategic price points relative to the competition. It involves research into competitors’ prices and selecting a price range that works best for business scalability. The chosen prices could be similar, higher, or lower compared to competitor brands.
Usually, this model is implemented by businesses when their respective products or services have been in the market for a long time. Or, when there are multiple substitutes available for the same.
There are different kinds of competitive pricing strategies that brands adopt to gain an edge over competitors. Each of these strategies varies in terms of how they are executed while the end goal of beating the competition remains the same.
1. Loss Leader Strategy (Low-cost Guarantee)
When a brand seeks to outperform another in terms of sales and increase its market share, the easiest way to do this is by reducing prices. A loss leader is a product or service that is sold at a significantly discounted price. At times, such a price may result in losses too. So, for this strategy to work, the profits gained from goods other than loss leaders should cover the losses from loss leaders.
Reduced prices lead to higher product sales, increased traffic to the business, and help the respective brand clear out its stagnant inventory. More often than not, this strategy can also result in price wars where brands are forced to keep up with the competition despite making huge losses.
Many times, loss leader prices cannot be officially published so as to avoid Minimum Advertised Price (MAP) violations. You can learn how to drive more sales to your products while ensuring that the retailers abide by your MAP policies here.
As part of the introductory offer, Gillette initially sold mechanical razors at rock-bottom prices compared to its competitors. The idea was to get hold of a bigger customer base. Eventually, every razor requires a replacement of blades after constant usage. Gillette, however, sold high-quality blades at high prices and made up for the initial losses. The company successfully utilized the loss leader strategy to achieve both profitability and a customer base.
2. Price Skimming Strategy (Premium Price Points)
In the price skimming or prestige pricing strategy, businesses charge higher prices compared to their competitors. It is usually implemented by businesses that offer products and services with relatively higher or better features.
For this strategy to work, brands need to:
- Enhance the value of their offerings in comparison to those of their competitors
- Ensure that consumers are made aware of the difference that justifies the premium price through smart brand and marketing activities
In general, higher price tags are used by brands that have a firmly established reputation to provide luxury or premium products in their niche.
Apple is one of the best examples in the premium category. The company’s business strategy is simple: It focuses on creating top-quality, high-end products that its target market sees as unique or innovative and thereby, justifies the price tag attached to it.
3. Price Matching Strategy (Price Match Assurance)
In cases where a company is unable to anticipate the price changes of competitor products or is not well-equipped to make timely decisions, the retailer may offer to match the advertised competitor prices. This enables the retailer to maintain a competitive advantage with those who are aware of competitors’ offers without officially announcing price changes.
In 2014, Amazon changed the prices of nearly 80 million products while gearing up to beat the competition in the holiday season. It is also worth noting that chains like Walmart and Best Buy announced price matching schemes ensuring that they do not lose customers to Amazon purely because of low prices.
We see applications of competitive pricing strategies around us almost every day. The following section explains the benefits associated with competitive pricing strategies in detail.
Google’s survey into consumer insights showed that 87% of shoppers mentioned the price of a product to be a significant factor in repeating purchases from a brand. Price comparison has become inevitable with the boom of online shopping and e-commerce marketplaces. Besides enhanced sales, brands that employ a competitive pricing model can enjoy the following benefits:
1. High success rate and profit margins
The price of a product or service is often considered one of the most important criteria for making final purchase decisions. Did you know that more than 60% of shoppers consider it to be the first and most important indicator of understanding whether or not they have a ‘good deal’?
Clearly, digital consumers give paramount importance to price comparison. Therefore, adapting competitive pricing strategies will keep your consumer base stable, and ensure that your business enjoys a high success rate.
2. Increased traffic
Studies show that an average online shopper will visit a minimum of 3 websites before finalizing their purchase decision. Whether it is a well-established brand or a budding business, an increase in traffic is always desirable.
Businesses that consistently offer the best discounts receive huge consumer traffic. A competitive pricing strategy can be of great help here. It lets you execute various discount tactics that help in creating more leads, increasing sales, and attracting more and/or new customers.
3. Simple and accurate
In comparison to other pricing models, competitive pricing can be implemented with ease. It requires a fundamental understanding of competitor products and deep insights into their pricing policies that can be achieved with Digital shelf analytics softwares like MetricsCart.
Price intelligence softwares also offer simulation and precise planning tools which enable businesses to get high returns on investment (ROIs) from their marketing spends. What’s more? These real-time actionable insights can be accessed with just a few taps on the dashboard.
4. Low risk
Competitive pricing is one of the safest pricing models that new businesses can adopt. Brands can mitigate risk by studying well-known players in the industry. Besides, this also helps in enlarging the customer base and retaining them in the long run.
Furthermore, it can act as a deterrent to market share losses and enhance profitability. This is especially true if your products or services have a unique value proposition compared to those of your competitors.
A recent survey shows that about 70% of online shoppers say that competitive pricing is what influences them the most when buying from online retailers. This is especially true in case of weekend sales or during holiday seasons like Christmas, Black Fridays, etc.
There are three important stages in conducting a successful, efficient competitive analysis. They are as follows:
Stage 1: Research
Look into your direct and indirect competitors:
The first step requires you to take on the role of a consumer and search for your direct and indirect competitors. Understand how they are pricing their products in direct competition to yours.
The difference between indirect and direct competitors is that direct competitors operate specifically in your industry while indirect competitors operate in a different industry but their products and services can compete with you. For example, indirect competitors include specialist stores or local traders that can eat into your profit margins.
Understand their value proposition and product quality:
A significant part of your research should be dedicated to examining competitor products’ value propositions and quality. This is a great way to figure out if they are actually competing with your offerings. Their marketing strategies, sales brochures, etc are a good starting point. This exercise lets you determine your products’ actual prices before setting them based on the market conditions.
Stage 2: Price Index Calculation
It is easy to find brands that offer similar products and directly compete with you. However, the challenge lies in determining companies that provide the same products but follow a different business model. It is worth noting that not all competitors pose the same threat.
The price index gives brands the scope to identify these competitors and create a pricing model that works best. This approach involves three steps:
- Knowing the competitors’ offers (via product catalogs or sales brochures)
- Knowing their sales history data
- Calculating the price index (PI)
The formula for calculating the price index is as follows:
The price index serves useful in:
- Improving sales
- Obtaining better positioning in the market
- Finding loopholes in competitors’ strategies
- Knowing how and when to make changes to your pricing strategy
- Gaining an edge over the competition
For instance, if a competitor brand’s price index is much lower compared to yours, it implies that they have managed to secure a better price from the supplier. Or, you can use it to find out which product category your products compete in best. That said, these calculations are often tedious and time-consuming. Price intelligence softwares come in handy here.
Stage 3: Execution
Once you have a hold on competitor data and the price index, you can go ahead and implement any of the aforementioned competitive strategies. Competitive pricing is one of the most effective and flexible strategies. It can either be applied alone or combined with other strategies like dynamic pricing. Moreover, relying on a single strategy might not be the best idea always.
Competitive Pricing: The Faster Lane to High Sales Margins
A competitive pricing strategy does not directly translate to cutting your prices short. You can also use this method to test price hikes alongside monitoring competition. It is a smart way to improve profit margins while being competitive and digital shelf analytics offers the easiest way to do this.
Success in e-commerce marketplaces is mostly about navigating pricing challenges cleverly. At MetricsCart, we offer Digital Shelf Analytics services that enable you to deal with such situations effortlessly. You can make use of real-time price intelligence solutions, monitor visibility, track location-based inventory, receive immediate alerts of MAP violations, and much more. Connect with our experts today!