How to Build a Competitive Pricing Strategy from Scratch
Retailers willing to outsell their competitors and boost their revenue, use a competitive pricing strategy based on analysis of the historical and competitive data. Building such a strategy requires the knowledge of the market, or data about competitors, clear business goals and time.
The article outlines several pieces of advice on how to craft an effective pricing strategy.
Why Is Competitive Pricing Strategy Beneficial?
According to Forrester Consulting, 81% of buyers compare the offers of several stores in search of a better bargain. Thus those retailers who can collect and analyze the market data, map their position against competitors and craft an optimal price, which also factors in their current business goals, win.
Competitive pricing strategy helps businesses attract more customers with the help of an optimal price, and thus significantly increase sales, optimize cooperation with suppliers, and boost revenue.
1. Determine the Quality of Data
Competera’s portfolio includes over 130 clients worldwide, which gives it grounds for stating: complete and accurate data is crucial to analyze competitors. Retailers from six countries surveyed by Competera agreed upon the following criteria of high-quality data:
- The depth of comparisons. Retailers need to take everything into account: color, technical characteristics and other parameters not available on the main product card.
- The percentage of errors. Manual comparison enhances automatic solution and ensures better results.
- The ratio of planned and delivered data. Data can be incomplete since the algorithm may lack information which is not available on the competitor’s website.
- The freshness of data. Retailers should use the data collected no later than two hours before repricing.
- Data delivery time. The data should be delivered to the retailer’s internal system every 20-30 minutes to make the comparison analysis more effective.
Get to know more about the benefits of competitive pricing analysis
2. Determine the Type of Data
Before collecting data, retailers need to define their competitors and set the parameters of competitive data they need to analyze and base their pricing decisions on:
- Price Index. It maps the retailer’s position in the market, shows how the market dynamics affects sales and delivers data on competitive prices, promotions and stock availability.
- Competitors’ promo activity. In the same study, Forrester Consulting indicated that at least a third of customers are trying to find discounts before buying the goods. It is essential to continuously monitor what competitors’ actions to optimize the retailer’s promotional offers.
- Products availability. By monitoring competitors’ stock, retailers can make the right decisions about selling products based on whether the competitor offers them.
Many retailers consider competitive pricing exclusively as peer group analysis.
However, the definition of competitive price analysis stipulates a thorough study of internal company data (or historical data), as well as competitors’ activities (such as pricing, stock, and promo, among others). It is impossible to set optimal prices without having the profound knowledge of the market and the retailer’s position in it.
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Use competitive data to craft a winning pricing strategy:
- automatic, manual or hybrid product matches
- custom scanning schedule
- dedicated scraping system
- full transparency of the data quality
- seamless integration with any IT infrastructure
- Primary — includes direct competitors, who pursue the same buyer category.
- Secondary — competitors who focus on upscale/downscale versions of the retailer’s assortment. Analyzing secondary level competitors allows businesses to develop big-picture thinking and boost their strategic skills.
- Tertiary — includes products which are indirectly relevant to those of the retailer. Analyzing this level of competition helps retailers willing to expand their assortment.
Categorizing competitors makes the market analysis less time-consuming and allows focusing on those businesses which require primary attention.
4. Use Machine-Based Pricing Comparison Tools
Today’s retail is increasingly leaning towards algorithms to collect and analyze data. Machines have significant benefits over manual approach:
- they make no mistakes;
- process any amount of data by any parameter;
- deliver it on a schedule;
- provide pricing recommendations.
What is arguably the most important is that algorithms allow retail teams to switch from routine to strategic tasks such as building a winning pricing strategy.
5. Track Competitors’ Online Activity
To have a better understanding of the market and competitors’ positioning, retailers need to study their websites and social media accounts. There are several aspects businesses need to examine:
- product descriptions;
- visual presentation;
- social media activity;
- if the websites and social media accounts are mobile-friendly;
- customer support and feedback options;
- the response rate.
In addition, retailers can sign up for a newsletter and become a follower of their competitors on social media. Businesses need to understand what attracts clients to competitors’ products.
These are several examples of how retailers can benefit from open source information. The more key points they identify and analyze, the faster they progress.
Well-balanced pricing strategies, which allow businesses to instantly react to the market changes, factor in a variety of aspects, besides pricing per se. These include historical data, as well as promotions, stock availability, seasonality, customer behavior, and price elasticity, among other numerous parameters.
The article covers three top-notch pricing strategies which enable retailers to outsell competitors and spur revenue.
Loss Leaders Pricing
The loss leader is a product which retailers sell at a price lower than prime cost to bring customers to either their website or into a physical store. Such a product is always placed next to another one which comes with a heavy markup. Bought together, they allow breaking even or increasing revenue.
Thus, Amazon uses the same approach in its Prime membership package by offering discounts for selected products while charging more for delivery. The company also uses it to bring attention to new books by selling them at a discount and advertising other books priced with a markup on the same page.
The strategy helps to entice customers and increase profit if the loss leader is:
- a perishable product;
- sold along with products with a markup;
- a product that customers often buy.
- customers, also known as “cherry pickers,” may only purchase the loss leader product. That is why placement is crucial.
- the loss leader strategy may be less beneficial for smaller businesses since they do not have enough resources to handle potential losses.
This strategy uses the assumption that specific types of prices psychologically influence shoppers. There are several types of psychological pricing, namely the one which omits currency signs, prestige and bundle pricing, as well as a round price points pricing.
No Currency Sign
According to research by the Cornell University, the customers of St. Andrew’s Café in New York who were presented with menus lacking dollar signs spent more than those who saw the sign.
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Use competitive data to:
- find optimal price points
- calculate the price elasticity
- be updated about constantly changing pricing factors
- craft a winning pricing strategy
- build dynamic pricing
Businesses price their products as high as they can to attract consumers who have an eye for premium goods only available to a limited number of people. However, the approach has two pitfalls:
- customers expect to buy products the quality of which equals the price;
- it targets a small fraction of buyers.
Round Price Points
Retailers set prices a few cents under a round number (for example, $599 instead of $600). Such an approach stems from the idea that specific prices, or even price ranges, appeal to shoppers more than others.
However, the strategy may have a reversed effect as customers tend to equate a lower price with lower quality. Additionally, it is difficult for buyers to calculate the final price if they shop for a group of products with such prices.
Businesses sell several products or services together at a lower price than for an individual item. The strategy is beneficial for retailers willing to clean off their shelves since the offer usually includes products which are not popular among customers.
Such an approach mainly helps to attract customers. However, it is easy to lose them once the price increases.
Dynamic Competitive Pricing
Unlike static prices, which remain the same regardless of the situation, dynamic prices are flexible and allow retailers to react quickly to the market changes.
The graph below reflects the way dynamic pricing works: prices were constantly changing throughout the year in 2017 while hitting the peak during the holiday season, or the most profitable season, in December.
These are the main factors which influence pricing decisions and contribute to crafting a dynamic pricing strategy:
- customer behaviour;
- competitors’ prices;
- competitors’ inventory;
- price elasticity;
- Retailers can decrease prices for a group of products to boost their sales and clear off their shelves.
- Significantly higher competitive prices allow retailers to increase their prices and thus revenue while remaining highly competitive.
- According to Forrester Research, a dynamic pricing strategy increases profits by 25% and gross margins by 10%.
- Shoppers may divert away from retailers who change their prices too frequently.
- Potential price war.
- Retailers need to collect and process a big amount of data, which is impossible to do manually.
Retailers willing to attract and retain customers and, as a result, increase their revenue are poised to use a competitive pricing strategy. To craft such a strategy, they need to do the following:
- Identify and categorize their competitors.
- Set the parameters and type of competitive data they need to collect and analyze.
- Use machine-based solutions which collect and analyze high-quality and timely competitive.
- Track competitors’ online activity (websites and social media accounts) to understand what makes customers choose them in addition to price.