The Top Three Mistakes Made with Pricing (Article 3 of 3)
The Top Three Common Pricing Mistakes
(Article 3 of 3)
Pricing to the competition…
Over time, I have observed many companies making the same mistakes with pricing. Put simply, most of these mistakes can be easily avoided by gaining the knowledge of knowing they are just that—mistakes. Making these types of mistakes with pricing will lead to below-par performance: resulting in lower sales volume or profit margin or even both, compared with pricing correctly.
I want to cover the most common mistakes in this series of three articles. In this article, I will examine the mistake of setting prices to the competition.
1. Pricing to the competition
When setting prices, the prices set for the competition's products or services cannot be ignored but at the same time, it cannot be the only data factored into your pricing. When mirroring a competitor’s pricing, several problems will be encountered:
Actually knowing the exact prices the competition sets for its products or services is extremely difficult to attain, other than if their prices feature on commodity exchanges (who publish those prices). Another difficulty is encountered, even if you know the prices set by your competition, for instance, companies selling, Software as a Service (SaaS), who regularly publish their prices, because it is near impossible to attain the data on what special deals, discounts and other incentives the competition offer to their customers. Of course, products sold online will have their prices for all to see. And this factor helps competing companies gauge their competitors’ prices. However, online prices do not remain static, they can change constantly when factors such as the purchasing and browsing history as well as the geographical location of the consumer or when a person checks the competition’s prices are taken into account. Also, prices can change numerous times each day as the competition sees how various price points affect its prices, meaning this source of information on the competition’s prices is not totally dependable.
Finding prices or price lists from a competitor is just about impossible especially if they do not intentionally publish that information. Some companies go down the route of obtaining their competitors’ price lists, however, this pricing information is rarely accurate and incomplete; for instance, it contains an outdated price list from last year, or a price list for a specific vertical market that has been uniquely-negotiated, or an international price list, or even just a partial price list. The practice of trying to obtain detailed pricing information by talking with joint customers will rarely give you the data you require. Even if these joint customers are willing to disclose your competitor’s prices to you, there is another problem attached to this information given by them, these customers will nearly always lower the figure. There is a good reason why they will do this. They are looking for the next best deal when they buy from you again. Lowering the price of the competition’s products or services will probably mean you will lower your price to match them, then the customer wins either way. So, it is not in their best interest to disclose your competitors’ prices to you.
Now finally, let us look at what might be the most severe mistake of them all. What if a company manages to actually obtain detailed and dependable pricing information on its competition and then make a decision to match its competitor’s prices, this move will ensure that the company just entered the unwanted “death spiral” of commoditization. It is a big mistake! By doing this, the company has ignored and relegated all that is unique about its own product or service such as the functions, features, and benefits that make its product or service stand out from the competition. Some, if not all of these add a specific value for some of your customers, a value that they are willing to pay a higher price for. But by ignoring this factor, the low prices will just result in being the main driver for sales and in turn, lowering margins or even starting a price war in the market. And believe me, there are no winners involved in a price war, only losers. Even the customers will not benefit from a price war when companies go bust, or they cannot provide the right customer support or lack the scope or resources to develop new and improved products or services.
Companies that price their products or services according to their customers’ willingness to pay rather than the traditional method of pricing to the competition will invariably experience a higher volume of sales or a healthy profit margin attached. In some cases, both—now that sounds like an attractive prospect for making a relatively simple change to the way you set your prices. Do you not think so?
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