Competitive pricing: Definition
Competitive pricing aka competitor-based pricing is a retail pricing strategy that considers competitive prices, promotions and inventory data to set retailer’s prices. It makes a part of the dynamic pricing. According to retailers business goals, such prices can be equal, lower or higher than the competitors’ ones.
This approach is very popular in markets with a high level of competition, e.g. electronics, toys, etc. where retailers sell similar products. In the case of proper usage, it allows a retailer to increase its profits and outcompete rivals. The reason? Most buyers nowadays browse many stores in order to find the optimal price, a task which is easy to accomplish as long as prices of the online stores are publicly available.
Let’s assume a retailer decides to use competitive pricing as a part of his pricing strategy. Here is how such competitive pricing strategy example might look like:
“During the second quarter, we’re testing new approach so all XYZ brand TV’s should be sold using competitive pricing to increase turnover and margin. The prices should consider competitive prices, markdowns, and promos.”
After category or pricing managers get such a task, they start to divide the TV inventory by segments to define which products are more profitable and help achieve margin goal, and which are cheap, yet popular so they might apply other tactics to increase their turnover.
Now they can set pricing rules for each segment. Here is how this competitive pricing example would look like on a segment level:
- Popular and cheap TV’s → In the case of rival shops decreasing their prices for this segment, we will set our prices 1% cheaper.
- Margin generating TV’s → To achieve our margin goal we’re going to test price elasticity for this segment before setting pricing strategy. We’ll set our prices 0.5-1-1.5-2-2.5%-... higher than competitors do until sales drop. Then we’ll stick to the most profitable percentage.
- Other TV’s → We are keeping prices equal to the market equilibrium level.
Competitive pricing strategy
As you can see, this is a challenge retailers face.
To implement such competitive pricing strategies, they can use spreadsheets and manual workforce. This approach can be implemented with ease yet hides enormous dangers. Manual workforce and tools with low intelligence produce mistakes.
There might be a low percentage of human-based mistakes, let’s say around 1%. But for a huge store with thousand products and dozens of sales per hour, it can become critical: 1% of $1 mln turnovers is $10K. At the same time, for small and vulnerable businesses competitive pricing could be a deadly practice by itself because they literally have no margin for error.
That’s why retail businesses, regardless of size, need to use advanced pricing solutions to deal with the task. They’ll help to deal few roadblocks retailer meets on the competitive pricing scenario path:
- Quick collection of competitive data points from different sources, process and analyze it
- Considering not only competitive prices and retailer’s costs, but also markdowns and promotions when setting repricing rules
- Rapid repricing accordingly to market changes to fit competitive market pricing strategy
- Analyse competitive pricing strategy on the fly to correct it and meet all retail KPI’s.
Competitive pricing analysis
Even more, all the aforementioned points is just the tip of the pricing iceberg.
What do you need to analyze?
Implement competition-based pricing by tracking your competitors’ prices, but then — make decisions by analyzing them and implementing great pricing decisions.
There are several factors a retailer needs to monitor along with competitive prices. Just to name some of them, it’s collecting data on competitors’ promos and markdowns to apply efficient promo management and use inventory forecasting models to manage stocks. Be attentive towards:
- Price positioning of your rivals compared to your own store to understand which rival may influence your sales, what items may be sold at higher price, and what prices are too high.
- Promos, discounts and other activities of the competitors. Many customers tend to look for special deals before purchasing things. Constantly track all discounts and deals on the market and launch your own promo being equipped with trustworthy competitor data.
- Stock availability. If some of your rivals are out of some items, make conclusions!
Pricing is only part science, but it also art. To master competitive pricing intelligence retailers need not only to do competitive pricing research to use competitive prices in retail pricing strategy creation but also to contemplate other factors and consumers’ demand.
One of the main tasks for the retailer is to get high-quality data on other retailers on the market. Data quality should be guaranteed by the data provider, all data should be delivered in a single interface with detailed transparent reports. Analysis of the qualitative data makes the essence of optimal competitive pricing. What else does it give to a retailer? It’s important to realize what the value of product is to the end user. It helps develop business strategies, find a better path to become a retail winner. Not less important, is choosing the right pricing scenarios and pricing models. Strategic thinking is of great use in this case!
As for consumer demand, the retailer can identify patterns in time series data (e.g. seasonality, etc.), watch category trends, calculate the price elasticity of every product or even build an econometric model.
As you can see, to consider all the mentioned variables, retailers need to use an efficient price intelligence solution. The data should be represented in a friendly to the user interface, to make pricing decisions quickly and effectively. Another requirement: the ability to set up your own schedule for data delivery in order to outperform the competitors by choosing the best repricing time.
Wouldn’t it also be nice to have price recommendations given by your smart competitive intelligence tool? That’s also helpful when you’re trying to avoid price deviations. Competitive pricing based on historical data is even more efficient to dive deeper into market insights, to better understand your performance in comparison with rivals.
Using a good competitive pricing software will greatly help increase margins and sales, get a larger market share and improve relations with suppliers.