In any given industry, it is important to figure out how prices are determined and where your company’s prices stand in relation to those of other companies. There is, in fact, a distinct method that companies use to accomplish this, and it is known as competitive pricing analysis.
Once analyses are conducted, companies need to come up with plans for how they will establish their pricing mechanisms. This process is known as competitive pricing strategy. This article will examine both of these concepts and explain how using them will help your business.
What is competitive pricing analysis?
Competitive pricing analysis is analysis of how consumer behavior influences prices on the market. While there are, of course, different factors involved in price determination (including materials cost, production, etc), pricing analysis only focuses on the consumer element of price formation. Competitive pricing analysis looks at consumer behavior in markets where there are multiple options of any given item to choose from, and it examines the reasons behind people’s choices of particular items.
How does competitive pricing analysis work?
There are several factors to keep in mind in conducting a competitive pricing analysis:
- The competition needs to be identified accurately. In order to conduct any sort of comparative analysis, you first need to determine exactly who the competition is. While some companies might offer somewhat similar products or services to yours, you need to determine which ones are your direct competitors so that the analysis you make can be as accurate as possible. Therefore, you need to categorize your competitors into different levels, depending on how directly comparable their products are to yours.
- In analyzing consumer choices, be sure that your comparisons take into account comparable factors, i.e., time periods, product types, etc. Remember that there are a lot of factors involved in any given analysis, and many of these factors are subject to constant change. If a given product is popular in the summertime, for example, that does not necessarily mean that it will be as popular in the fall. If you’re making comparisons between your company and others, all of these data should be categorized as accurately as possible.
- Channels play a role. These days, even identical products can vary significantly in price depending on how they are sold. E-commerce, for example, has a major effect on prices. Whether people choose to order products online or in-store is a factor in their decision making, for example.
- Consider promotional history. Promotions are, of course, a major factor in influencing the decision making process of consumers. Therefore, in conducting any analysis, you should make a comparison between your promotional history and those of your competitors. You’ll also want to take into consideration the various advertising means of your competitors (social media, website, etc), as well.
In conducting your analysis, you’ll want to find the right program to help you. Given the amount of data that you’ll be working with, you’ll definitely need a proper tool to help you with your analysis and keep your data organized. Once you’ve completed your analysis, you can start thinking about putting together your competitive pricing strategy.
What is competitive pricing strategy?
Competitive pricing strategy is the establishing of prices based on those of a given company’s competitors. There are three major categories that companies use to establish prices in conducting strategies:
- Pricing above the competition. This might sound like an odd concept, but there are, in fact, cases in which companies want to set prices above those of their competitors. If a company believes that their products are distinctly superior in quality or value, pricing above might be called for. If marketed properly, this can actually be a positive influence on consumer behavior as there are categories of consumers that look for higher-quality products.
- Price matching with the competition. In many cases, companies choose to match their prices with those of the competition. If the products in question are truly comparable, it is logical that prices should be, too. In these situations, companies instead focus their marketing efforts on whatever other characteristics of their products they consider to be unique.
- Pricing below the competition. If, for example, a product is being mass produced at a much-reduced cost, a company might offer it at a reduced price. Certain products might be offered at a reduced cost only for a limited period of time in order to catch consumers’ attention.
Competitor-based pricing can either be implemented by itself, or alongside other pricing strategies, such as value-based pricing. Many strategies incorporate diverse elements into their overall plans.
Things to keep in mind
Although competitor price analyses and competitor price strategies are extremely useful tools in marketing, they should be implemented with caution. Companies shouldn’t become overly reliant on these models, because they will eventually run the risk of simply becoming part of the crowd. Business leaders shouldn’t be afraid to innovate, follow their vision, and do their own thing.
This doesn’t mean reckless product creation without planning. But it is the case that consumers tend to seek out specific companies because they value what these companies in particular have to offer. Not staying true to your vision means that you are just out to make money, and potential customers realize this.
Therefore, while you should absolutely pay attention to the competition, don’t lose sight of why you went into business in the first place. Your customers will appreciate your integrity.
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