Pricing strategies are a reasonable choice of several price options (or a list of prices), aimed at achieving the maximum profit for the company in the market within the planned period. In the modern practice of pricing, a branched system of pricing strategies is used, which is generally presented as follows:
1. Strategies of differential pricing
2. Strategies of competitive pricing
3. Strategies of assortment pricing
In this article, we will consider competitive pricing. When forming the price for a product, we take into account at what price competitors sell this product at a given time.
Due to the availability of data on the competitive environment, it is possible to manage market positioning and effectively manage sales. Competitive pricing is necessary for every trading company with direct competition: goods from whose range are also sold by its competitors.
What is the value of competitive pricing?
Dynamic competitive pricing gains a significant increase in sales or margins in a very short period of time: improvement in performance occurs in the first week or even the first days after optimization.
Importantly, the company only gets that money by optimizing the price relative to a specific market.
WITHOUT quality automation of competitive pricing, companies either lose sales, cut their profits, or lose both profits and sales:
Some prices end up “above the market”
The top players lower the price, the company does not have time to react and loses customers.
Some of the prices are “below the market”
This situation is often encountered when increasing market share: the company is unable to take competitors’ prices into account promptly and sets an excessively aggressive price, far below all offers. At the same time, by setting a price equal to the “first”, “second”, “third” price on the market, the company would get the same sales volume, but with higher margins. That is, the company is constantly losing profits.
How to implement competitive pricing
The list of all competitors’ prices is simply a data set in itself. To integrate a competitive pricing strategy in the best possible way and ensure increased sales, you need the resulting metrics from competitor price monitoring. To determine competitive pricing for each product, the following parameters must be considered:
- the number of competitors;
- your price status regarding all other offers;
- the average price of all competitors;
- the percentage difference of your price from the average;
- the difference in percentage from the minimum and maximum prices offered by competitors;
- recommended price (the formula for calculation of this parameter can be changed if you wish).
These are really important parameters, which make it possible to make the right decision on your own price and ensure an increase in sales.
Managing Price Perception
There are prices of goods customers know very well. These are key product items or KVI (key value items). It is the cost that is compared with the prices in other stores, and it is the cost that forms the perception of the price level in general. If the customer considers the cost of key commodity items as comfortable, the price of other goods seems optimal to him or her. Identification of key commodity positions is critical for sales of any retail chain.
The average store has about 7,000 items in its matrix. It is almost impossible to get a sufficient sample of answers for each item with the help of surveys. Category management expertise also carries a large margin of error.
Only in-depth analytics can determine the KVI list with high accuracy without significant investment. Having data from loyalty programs, you can analyze what makes up a guest’s basket. Classify customers into more and less price-sensitive ones and divide the goods in their basket into those that really form price perception and those that have almost no influence on it.
So, the EDLP (Everyday Low Pricing) strategy speaks for itself — it is an approach where the retailer guarantees low prices every day. In fact, it is physically impossible to guarantee such prices, because it would require deploying an entire business platform to monitor prices in the market, so it is more correct to define such a strategy as “low prices every day”. Such a strategy involves:
- Regular market monitoring of prices for all (or most) of the store’s assortment.
- Strict rules of response to price changes in the market.
- Increased purchasing power.
- Well-established logistics and point-of-sale techniques (stock maintenance, stable displays, etc.).
When a customer accepts that prices in your store are acceptably low compared to other sellers, it creates a sense of price-value imbalance in the customer’s favor. In other words, the “value” of the item exceeds the price of the item. And if this law applies to all goods, the buyer gets the impression that the price is fair (“the seller is not profiting from the buyer”), and if compliance with such a law is guaranteed throughout, the buyer additionally gains a sense of stability.
What does a retailer gain by choosing this strategy:
There is no need to continuously announce low prices through marketing and advertising, which entails lower costs of promotion and maintaining sales.
A “stable” buyer and, as a consequence, reliable financial projections. Which, in turn, entails efficient development through proper resource allocation.
Buyers make purchases “here and now” without waiting for low prices (stock, season, etc.) because the price is already as low as possible.
And, of course, it is worth noting the disadvantages of this approach to pricing policy. First, this strategy entails significant financial costs, because maintaining prices at a low level hurts margins, especially if the company at some point decided to change its approach to price formation at the EDLP. The second is that the buyer doesn’t always match low prices with high quality, because several conditions are necessary for that:
- There must be players in the marketplace with a different pricing strategy, where prices for comparable products are higher than under EDLP.
- The buyer must be able to compare the prices of the two competitors and compare the price offer with his subjective assessment of the value of the products.
- In general, either a large retail chain (with appropriate purchasing power and costs) or companies capable of investing in long-term development can afford such a strategy.
Price wars are extremely detrimental to business, despite the fact that discounts are among the most popular tools for attracting customers. By using them, marketers are often unaware of the devastating effects on business. Discounts can quietly draw a company into a price war with competitors, with negative consequences.
The key weapon in such a struggle is pricing. Each “fighter” on such a field of war aims to offer the buyer more favorable conditions than his competitors. Events in this situation develop approximately as follows: Company A lowers prices by 10%, and the competitor in response to such measures — by 15%. This forces Company A to offer customers an even greater discount, and so on. All this leads to the fact that prices in the market fall to the cost level, which automatically provides companies with zero profit, as in perfect competition.
In the worst case, this policy leads to losses. Moreover, this situation helps to drive competitors out of the market, but it is worth bearing losses for a while, hoping that later it will be possible to benefit and remain a monopolist in this market, raise prices and compensate for all the losses.
Choosing the right pricing strategy is always a special case for almost every company because it is the diversity of market participants that drives the development of the modern economy. Having determined the list of key products and the distribution of the remaining SKUs into different sensitivity groups, it remains to choose the optimal pricing strategy for each of the groups. An overly conservative strategy may have no positive effect on traffic or even have a negative effect. Overly aggressive — lead to recursive changes and price wars.
And, even though there is no pre-packaged recipe, we can definitely assert — pricing strategy systematizes and substantiates the behavior of the business in the operational mode.