Top three pricing mistakes: Price to competition
(Article 1 of 3)
Over the years, I have seen so many companies make mistakes with pricing. These are mistakes that can easily be avoided just by knowing they are actual mistakes. These pricing mistakes lead to sub-optimal performance: lower sales volume or lower profit margins compared with the right way to price. Sometimes both.
This three-part article series will cover the most common mistakes; price to competition, using cost to price and using guesses to price.
1. Pricing to a competitor.
The price of competing products or services should not be ignored when setting prices but should by no means be the only data used. And there are several problems with parroting a competitor’s pricing:
- Unless prices are published as they are at commodity exchanges (for oil, grain, pork bellies, etc.), it is pretty difficult to actually know the prices a competitor offers to its customers. Even if the competitor publishes its prices, as is common for those companies selling, say, Software as a Service (SaaS), it is difficult, if not impossible to know what deals, discounts, and special deals the competitor is offering. Likewise, companies selling a product online will, of course, publish prices. And they are open for the competition to see. But these online prices can change based on the browsing history, the purchase history, or even based on the location of the buyer or the person checking the price of the competition. And, the competitor can change prices several times a day to test different price points. Thus, these are not fully dependable information sources of competitor’s prices.
- If a competitor does not publish prices, finding their prices or price list is almost impossible. Companies often try to obtain price lists from their competitors, but what they typically find is incomplete pricing information; it may be last years’ price list, or maybe a specially-negotiated price list for a specific vertical market, or maybe an international price list, or just a partial price list. Trying to talk to joint customers rarely gives any detailed pricing answers, and if these joint customers are willing to disclose your competitor’s prices, they are likely to low-ball the number. Why? For the simple reason that next time they buy from you they want a lower price or a better deal. It is not in their best interest to disclose competing prices.
- Finally, and this may be the most severe mistake: in the unlikely event a company can obtain true and dependable competitive pricing information, and the company decides to match the competitor’s price, the company has just entered the death spiral of commoditization. The company decides to ignore whatever in the product or service is unique. That is, the features, functions, and benefits that set the product or the service apart from the competition, and which adds specific value to at least some of the buyers — a specific value that these buyers are willing to pay higher prices for. Instead, it will be the low price that leads to sales. A low price that leads to lower margins and maybe even a price war. And there are no winners from a price war. Not even the customers will win, since the vendors will go out of business or will not be able to support the customers the right way or have the resources to develop new and better products.
Companies switching from competition-based pricing to pegging their price to their customers’ willingness to pay will see higher sales volumes or higher profits. Sometimes both. And who would not want that!
Don’t forget to look out for the second installment in this series: Using cost as the base for pricing.
Per Sjofors is the founder of Atenga Inc.
Pricing has always been an interest area for Per. As a serial entrepreneur, running companies in Europe and the US, he experimented with pricing. Some of these worked spectacularly well, some did not work at all. As a result, Per founded Atenga Insights Inc. out of his frustration for what business schools teach about pricing is too abstract, too academic for a business executive to act on. Likewise, with books about pricing. Consequently, he set out to make pricing: both practical and actionable. Pricing for businesspeople. Since then, he has been at the forefront as a thought leader in everything pricing and he is a sought-after speaker for a variety of conferences and business circuits.
Per appears regularly on business radio shows and gets quoted regularly in the financial press, including Forbes, Fortune Magazine, Inc., Industry Week, Business Insider and the Financial Times.
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