Were you aware that, on average, a 1% increase in price equates to a gain of 8.7% in operating profit?
Isn’t it surprising that a minimal percentage increase or decrease in price can have a major impact on profitability? This just shows how important pricing can be to the bottom line of your business.
At this point, you’re probably wondering which pricing strategies can help you gain a profit. Should you charge the average pricing in your industry? Or should you price your products well above the market? We would recommend pricing that is based on competition, commonly known as competition-based pricing.
In this pricing model, the prices of rivals are used as a reference point. Products are priced at, lower than, or above competitive prices, instead of pricing them based on demand from customers or the cost of production. It is also known as a competitive pricing strategy, or competitor-based pricing.
One of the most important aspects of competition-based pricing is competitor price monitoring. Monitoring your competition is one of the important aspects to consider if you want to be successful in the marketplace today. We are no longer living in times where the greatest challenge for businesses was the upfront startup costs.
Establishing your company in a prime location in the past meant you had little competition, if not complete hegemony. However, we see less of this today as the internet is increasingly narrowing the disparities between marketplaces and businesses that utilize e-commerce.
Currently, the e-commerce landscape is incredibly competitive. To deal with this reality, many retailers employ a pricing manager and use various tactics to counteract the actions of their competitors in a bid to get ahead of them in the market.
One of these tactics, which also happens to be the main driver of a buying decision, is pricing. It has become almost critical for e-commerce businesses to utilize competitor pricing analysis to extract valuable competitor pricing data and price their products accordingly.
Understanding Competitor Pricing Analysis and Its Benefits for E-Commerce Companies
A business determines the optimal price point based on the in-house prices, market demand, and what their rivals are paying for to increase profitability. If the competitor price monitoring is used, it can earn you that exact amount with specific e-commerce initiatives.
But why is tracking or analysis competitor pricing so important? Why not focus more on reducing the internal costs? The reality is that price tags have a far more influential role in the buying decisions of consumers in online shopping than conventional shopping.
In addition to pricing products optimally, competitor pricing analysis is needed by e-commerce businesses for the following:
- Identifying those competitors that potentially impact your sales
- Establishing the most important categories of products for every adjustment made by your competitors
- Recognizing your price positioning towards the pricing in the market or competitors’ pricing
- Selling certain products at a premium without losing profit
Forrester Consulting finds that 81% of purchasers compare different stores’ offers in search of a better deal. Retailers capable of collecting and analyzing market data, mapping their status against competitors and offering optimum prices are the businesses that first capture the attention of those buyers.
Competitive pricing is the practice that helps companies gain new clients by optimizing prices utilizing product and pricing data from competitors. An effective pricing strategy can greatly increase sales, boost cooperation with vendors and enhance profitability.
In short, e-commerce businesses need to monitor their competitors for pricing if they want to gain a competitive advantage based on pricing and be successful in their marketplace. The importance of a competitive pricing strategy in pricing products and/or services and the steps for obtaining high quality competitor price data are detailed in the following chapters.
The Importance of a Competitive Pricing Strategy for Pricing Managers and Sales Teams
Also known as a competition-based strategy, a competitive pricing strategy is mostly used by companies selling similar goods. In this scenario, it is often the case of one company or a collection of companies with the most sales or customers in a marketplace or niche being used as a benchmark for pricing products and/or services.
For example, e-commerce businesses often use this approach as potential customers often determine the cost of moving between each rival (e.g., cheaper pricing versus greater quality). The products are quite similar in design and purpose.
With a competitive pricing strategy, companies have three choices for pricing their products:
- Setting prices lower than the pricing of competitors
- Pricing the same as competitors’ pricing
- Setting prices higher than the prices of competitors
So how does this pricing strategy benefit businesses and their sales teams?
If a business prices its products below rivals, it would automatically become a low-cost leader in its market. One the other hand, the sales teams of the business will be able to use the low price to communicate the value of the products and attract new customers. An important point to consider here is that companies often reduce manufacturing and operational expenses before lowering their prices to ensure their profitability does not drop too much.
When a company approaches the market price, it needs to differentiate itself from the market. This is often done using innovative marketing and sales/promotional strategies which help generate a unique value proposition (UVP).
A business choosing to price its products/services above competitor prices must justify the higher price. This can be achieved by providing additional functionality, extra advantages (e.g. world class customer service), or by manufacturing products of greater quality than rivals.
Whether you choose to set prices lower than, at par with, or higher than the pricing of competitors, a competitive pricing strategy will allow you to stay ahead of the competition and keep prices flexible as compared to your competitors in the market.
The Steps for Obtaining High Quality Competitor Price Data
Competitive price monitoring is a crucial part of developing a successful price strategy. Since the competition is fierce today, tracking and monitoring the prices, promotional efforts and offers of your competition in real-time are critical. This will enable you to measure your strategies against those of your competitors, customer responsiveness and standing in the market.
So, how should you perform competitor pricing analysis to obtain high quality competitor price data? The steps for this are detailed below.
1. Categorize Your Competitors
The step is categorizing competitors based on a variety of factors, which include target market and quality of products, but are not limited to them. The three main categories that you can divide the market competition into include:
Primary—Direct competitors who cater to the same segment of buyers.
Secondary—Competitors focusing on upscale / downscale variants of your assortment
Tertiary—Businesses that sell items indirectly related to yours.
By categorizing competitors, you can save time in competitor pricing analysis and focus your attention on competition that actually matters.
2. Identify Your Competitors Affecting Sales
Do you need to monitor every business in your market or niche? Considering that your market could have hundreds, if not thousands, of players vying for the customers’ attention, this could be virtually impossible.
So, who do you monitor then? You need to monitor your closest competitor or those directly affecting your sales. Take as much time as you need to find these competitors so that you don’t waste time monitoring competition that has little to no effect on your sales. Contrary to what you think, identifying your closest competitors isn’t too difficult. You can find competitors affecting sales by doing the following three things:
- Choosing and listing all possible competitors
- Use research tools and social media to find brands that use the same hashtags and keywords as you and then add them to the prepared list
- Shorten your list by selecting competitors with the most similar pricing, products, and target niche
3. Visualize Your Price Positioning
It is important to visualize your price positioning. This means creating a price positioning graph of your products, segments, major retailers, and the entire range of your online store because of identical competitor parameters.
By doing this, you’ll know exactly which of your competitors will impact your sales, and how strongly, over a certain period of time. You can use the Price Index to get a clear picture of the market situation, as well as your positioning towards competitors, at a particular time.
4. Determine Competitive Data Parameters for Collection and Analysis
Identify essential competitive data parameters that you need for collecting and assessing the pricing process of your closest competitors. Some of the most important competitive data parameters for pricing analysis include:
Price Index—This shows the position of a retailer in the marketplace over a certain period of time for a particular product or product category
Promotional Activity of Competitors—According to Forrester, one third of customers look for discounts before buying a product. This means that continuous monitoring of certain promotions and sales within the industry is necessary in order to maximize promotions.
Availability of Product –By tracking competitors and their inventory stocks, you can modify your pricing at a particular point in time, based on product supply or supply of a category of products on the market.
While this list is not only final, the aforementioned data is the most important to collect and analyze when using a competitive pricing strategy to price products and/or services.
5. Track Competitor’s Online Activity
You should track your competitors and their online channels such as official websites and social media pages to obtain a better knowledge of the market and its impact on pricing. The following are a few important things that you need to look into:
- Response rate
- Product descriptions
- Feedback and customer support options
- Visual presentation
- If competitors have a mobile-friendly website and social media pages
- Activity on social media
Tracking the above is important because it can help you determine what attracts consumers to the offerings of your competitors, which in turn will help you to price products optimally.
6. Monitor Day To Day and Historical Trends
Monitoring trends daily and over time will allow you to get a better perspective of the pricing policies and strategies of your specific competitors. You should set automatic timetables to track several retailers simultaneously. Additionally, you should look to retrieve more than just the price points. Search for data mentioned in step number 5.
You may also want to track the availability of stocks, look at historical patterns and averages, and establish alerts to warn you if there is a shift. Pull everything you need to price products optimally and thrive.
7. Look at Ecommerce Trends
The various kinds of summer clearances, Christmas offers, and weekend sales are all major ecommerce trends that you need to keep an eye on. Timing has a huge influence on the trends in online purchases and ecommerce. Therefore, your product pricing needs to be a continuous process which can be adjusted according to market dynamics and current situations.
8. Analyze the Data Using Intelligent Pricing Software
If you have enough spare time and do not mind crunching numbers after numbers, then you’re free to perform your competitor price monitoring manually. For the rest of you, we recommend getting automated support for this activity.
Why do you recommend using software for competitor price monitoring and price analysis? Competitive price monitoring software eliminates human error, ensures time savings, and provides alerts in real-time. Not only does the software allow you to monitor your competitors, but it also allows you to know the changes in price of their products.
Manually monitoring pricing increased your chances of noticing price changes late, or not at all in some situations, whereas a competitive price monitoring software system has to face no such problems.
Do you still wish to track your competitor’s price manually? There is no need to waste precious time on manual data collection. Automate the process so that you can focus on your core competency to help your business reach its maximum potential.