Why competitor-based pricing may fail

In the global and fast flowing world, pricing is a crucial process. For many businesses small adjustments can have tremendous consequences, both negative and positive. Outside of work we have all experienced a situation where we decided not to buy something because of the price. 

Pricing strategies are not always as well thought out as you might think. Imagine your own business, think about the prices you have for one of your products or services.Then answer try and answer these two questions: 

• What is the current price of said product or service
• How did your company land on that price? 

Sometimes, failing to set the right price can translate into lower sales volumes and lower profit margins. Other times, the result ends in both lower sales volume and higher profit margins. 

Pricing mistakes always affect the well being of your business, and should therefore be avoided. This means that, for example, when a company is setting prices, they should use accurate data. 

What is competitor-based pricing?

Before we get into the fun stuff, let’s define what competitor-based pricing is. Competitor-based pricing is when your pricing is heavily influenced by your competitors. This approach helps you focus on the price and forget about costs. It is generally used when you have a similar product to competitors. You are essentially piggybacking of what your competition has been doing, and hey if they are successful you should by all means  

Problems with competitors pricing

You might piggy back on their knowledge but you will also share their struggles. By this we mean that of course they might have great insights, and perhaps they have even done their due diligence and have set very appropriate prices in accordance with the market. However, you don’t know this unless you also know what the willingness to pay is. If they don’t and you copy them, both of you are essentially leaving money at the table. 

Should I ignore my competitors completely? 

Of course this doesn’t translate into you completely ignoring your competitors, nor the competition’s prices. This will be frustrating for some industries and there are some extreme examples. What Amazon did to the book industry in terms of pricing can be considered a slaying. Jeff Bezos was aggressive and willing to take a huge loss in order to take the biggest market share. Of course he had investors who believed in him, so he could run on a negative cash flow for years. But this was not possible for many smaller bookstores, eventually larger chains and publishers were also affected by Bezos aggressive pricing. Amazon completely changed the rules to the book industry’s pricing. 

Unless you are a bookstore, you might not have experienced this extreme development. But many B2C companies are competing against Amazon, and some have even decided to join forces and sell their product on Amazon. 

Circling back to the original question ‘Should I ignore my competitors completely?’. Of course not, keep a health tap on your competitors. Even if it is Amazon. Try and compare what they do with what you know and if there is anything outrageous who has an informational gap? Because maybe it’s you. Then you seriously need to consider getting your data insights and ensure you make the right decisions for your business. 

How should I set my prices?

As we have hinted at throughout this article, you need to gather data insights. Gathering insights from data will be split in two hurdles. First of gathering the data and secondly analyzing the data, both of these steps in turn need to follow the appropriate research methodology. Otherwise you get tainted data with wrongfully drawn conclusions. Either you hire someone in house to own this kind of data or you outsource and get external expertise. Regardless, make data driven decisions.