June 14, 2016
In this three part series, I will address analyzing competitor pricing. In Part 1 of the series, I discuss what competitor pricing analysis is and why your business needs to conduct this important analysis.
As a Pricing Manager, you spend countless hours analyzing your company’s pricing data and setting pricing levels required to reach management goals. At the prices you’ve set, your company is projected to have record revenue and profit. But do you know where your competition has positioned their prices?
How do you know that they have not established better pricing programs or volume incentives for which your happy customer will leave you? All the time you have spent and analysis you have done could be for nothing if you do not have insight into your competitor’s pricing.
What is Competitor Pricing Analysis?
When setting prices for a product, a business has three options where they can set their price relative to the competition—higher than, equal to, or lower than. How is a Pricing Manager to know which option is best? This is where the competitor pricing analysis can demonstrate its value.
Competitor pricing analysis is a tool that helps a business analyze, track, and compare pricing information from competitors, as well as assist in improving the price of an enterprise’s products in order to achieve higher revenue. These analyses are part of a comprehensive marketing strategy to identify all aspects of the market in which your business competes.
While creating a marketing strategy is not the basis of this blog series, it is critical to know other aspects of the market, including its size, your competitive advantage, the business model of your competitors, and a customer’s willingness to pay, among others. It’s not just knowing what your competitors are charging for a similar product.
Why Your Business Needs to Conduct Competitor Analysis?
There are numerous great quotes from the movie “Wall Street,” but the one that came to mind as I was thinking about competitor pricing analysis is: “The most valuable commodity I know of is information.” (Gordon Gekko) Conducting a thorough competitor pricing analysis is all about obtaining information about your competition.
The goal of the competitor pricing analysis is to use the information you’ve gathered to gain a general understanding of your competitor’s pricing so you can position your prices accordingly. It is not necessarily to be used to set your entire pricing strategy based on your competitors.
I believe you need to create your pricing strategy and not deviate dramatically just because your competitor does something drastic. By gathering information about your competitors you can use this information to make minor adjustments to pricing or your pricing strategy in certain areas.
For example, let’s say you’re in the tire industry and you sell tires for passenger cars and commercial applications. Within the commercial segment you’ve decided that you want to grow market share in the bus tire division.
The average price of a bus tire is about $250. You create a volume rebate incentive program for bus manufacturers that will give them a $20/tire rebate for all purchases over 500 units. After looking through the competitive bus tire pricing your sales force has gathered, you learn that at your current prices you are about $10/tire below both of your main competitors.
From a performance perspective, your tires do not perform as well as the competitors’, so the $10/tire price difference is reasonable. You know that with the rebate you will now be $30/tire less than your competitors. Although you should now gain market share, you decide the $20/tire rebate is too excessive and reduce it to $15/tire to be more in line with your growth strategy.
Moves like this perfectly find the middle ground that incorporates competitive intelligence with understanding of your own business objectives.
Having the competitive pricing data at your fingertips allows you to quickly make adjustments to your pricing. In order to have this data readily available, you will need to prepare a competitor pricing analysis throughout the year. This type of analysis is never finished. The market can change at any moment and you need to be ready to act as soon as it does.
Part 2 of this series will cover what resources are available for obtaining competitor information.