“Do we always match the cheapest competitor in the market? “
“How do you properly respond to price cuts by competitors? “
“Can we afford to start a price battle, and is it worth it? “
These could be questions you are asking yourself in terms of whether or not to react to competitors prices. In this article we will try to give you food for thought in terms of responding and considering price changes when initiated by your competitors.
Price competition
It is on most business agendas, and is a crucial factor when talking about being competitive. How do we set competitive prices, and thereby win all the consumers over. Engaging in price battles is therefore everyday life for many businesses, and especially with the current market situation. But engaging is not always the most appropriate solution, as you almost always enter a zero-sum or negative-sum game, where benefits are negative or non-existent.
The three potential outcomes of the Pricing Game
Therefore it is important to mention that: Market Share isn’t always the key to Profitability.
Pricing
When it comes to all aspects of pricing, there are three key steps you can use to define the prices for your products. These steps are available in what we call the pyramid of pricing.
Pricing Pyramid
The Pyramid of Pricing includes three important steps to consider when either defining or redefining your pricing on products, product categories or brands.
1. Define Price Window
What is your price window on this product / category? Here we define both the price floor and the price ceiling, and look at the window between these two.
Price Floor: Min Profit Margin 10% Price €32
Price window : €32-50€.
2. Define Competitive Landscape
Here it is important to ask you a lot of questions about the competitive landscape:
How is the competition on the product/ category/brand ( do you see more competitors following this price cut? Who are the main competitors, how big are the main competitors, how many competitors are in your price window?
3. Value Creation
When talking about value creation, a lot of questions and considerations need to be taken into account. Primarily this point is asking yourself whether or not the price you have defined, will give value to you, your customers or your brand collaboration. So basically asking and evaluating the negative,zero or positive outcomes mentioned above.
Respond or ignore?
Advising on whether to respond or ignore a price cut, is difficult and can vary a lot depending on who you are, what your pricing strategies are, and on the specific product, category and market situation.
Therefore we advise you to go through the Pricing Pyramid, and ask yourself all the relevant questions in terms of deciding whether to respond or not. If it, after long and tedious talks around the table, is still an unclear matter, we have interpreted a decision tree to help you out in deciding an appropriate response.
Response Tree
Interpreted from: Nagle, Thomas T., and Georg Müller. The strategy and tactics of pricing: A guide to growing more profitably. Routledge, 2017.
To work, discuss, and implement strategies, monitor and also create responses in PriceShape, please contact your Customer Success Manager.
Thank you for reading along and remember to read some of our other blog posts:
Use a supplementary feed in Google Merchant Center and stay competitive
How brands can use data to expand and control their assortment
Further free reading available on:
https://hbr.org/2000/03/how-to-fight-a-price-battle
