Pricing is one of the most complex, impactful decisions in retail. In a 2022 survey by Bain & Company, 97% of executives said pricing was one of their top three priorities. And for good reason – a suboptimal pricing strategy can sink profitability and market share.
In today‘s dynamic landscape, effectively leveraging competitive pricing is essential to retail success. But what exactly is competitive pricing and how can retailers optimize their strategies?
This comprehensive 2500+ word guide will unpack everything you need to know about competitive retail pricing, with insights and perspectives drawing on my experience as a pricing expert.
What is Competitive Pricing?
Competitive pricing refers to the practice of basing pricing decisions primarily on competitor prices and market demand trends rather than solely on internal cost structures and desired profit margins.
The core goal of a competitive pricing strategy is to maximize overall profits while remaining reasonably aligned with competitor pricing. Rather than existing in a vacuum, pricing decisions are made with careful consideration of the competitive landscape.
This involves extensive competitive intelligence to analyze competitor pricing across products and sales channels. It also requires understanding price elasticity – how responsive demand is to changes in price.
Armed with this external market data, retailers can model profit potential under various pricing scenarios to determine optimal competitive prices.
The Key Difference of Competitive Pricing
Competitive pricing differs from:
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Cost-plus pricing – Simply adding a fixed markup to product costs without considering market factors.
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Price skimming – Setting higher prices due to limited competition.
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Penetration pricing – Sacrificing margins with low prices to attract customers.
With competitive pricing, the focus expands beyond internal costs and desired margins. Setting the optimal price requires balancing those internal factors with careful analysis of competitor prices, price sensitivity, market conditions, and willingness to pay.
Competitive pricing leads to prices adapted specifically to market dynamics across unique products, customer segments, and sales channels. This specialized approach aims to outperform simplistic cost-plus formulas.
The Risks of Ignoring the Competition
Competitive pricing certainly has complexity. But the risks of not considering competitor prices and market factors are high:
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Missing profit potential – Failing to optimize prices for market willingness to pay.
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Losing market share – Being undercut by competitors who set more attractive prices.
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Alienating customers – Pricing too far above perceived value.
Regular competitive analysis and price adaptations are essential to maximize opportunity while mitigating risk.
Key Factors Influencing Competitive Pricing
Effective competitive pricing requires the analysis and balance of myriad internal and external factors.
Internal Factors
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Product costs – The foundational costs to acquire, manufacture and bring a product to market. The pricing floor.
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Desired profit margins – Target percentages set by management based on business objectives.
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Brand positioning – Premium vs budget brand perceptions that impact reasonable price ranges.
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Organizational goals – Wider business objectives beyond profit like market share, expansion, etc.
External Factors
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Competitor pricing – The most directly relevant factor, requiring ongoing monitoring.
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Consumer demand – Dictates the price ceiling based on willingness to pay.
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Market conditions – The competitive landscape including supplier costs, economic trends, regulations, etc.
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Price sensitivity – How demand responds to price changes for different customer segments.
Navigating the Complexity of Pricing Influencers
The diversity of internal and external pricing factors creates complexity. But by leveraging the right competitive intelligence, data analysis, and modeling techniques, optimal pricing can be derived.
We‘ll explore competitive intelligence more later in this guide. First, let‘s look at common competitive pricing strategies.
Competitive Pricing Strategies
Within the framework of competitive pricing, there are several strategic approaches:
Value Pricing
Prices are set based on the perceived value to customers relative to competitor prices and positioning. This requires analyzing varying price sensitivity and demand at different price points.
Example: A premium jeans retailer charges $80 instead of the $60 rate of mid-market competitors. Surveys show the target customer base will pay 20% more for the brand name and quality.
Dynamic Pricing
Prices are changed frequently in response to real-time shifts in market conditions, competitor prices, inventory levels, and other factors. Enabled by analytics and automation.
Example: An online fashion retailer uses algorithmic software to make minute-by-minute price adjustments based on their competitive position. Prices for a given SKU may change thousands of times per month.
Price Laddering
Offering an intentional range of price points from high to low to appeal to diverse customer segments. Allows optimizing prices for different groups.
Example: A hotel chain offers standard, business, and luxury suites at their properties to attract thriftier travelers and extravagant travelers alike.
Penetration Pricing
Intentionally lowering prices below competitors to rapidly gain market share when entering new markets or launching new products. Margins are temporarily sacrificed to build market presence. Prices later increase once a customer base is established.
Example: A supermarket chain opening its first location in a new town offers rock-bottom pricing on staples to attract customers away from incumbents. This ceases after six months.
Price Skimming
Setting high prices for new, innovative, or limited edition products to maximize profits. Used for products with minimal competition and inelastic demand. Prices decrease once competitors enter the space.
Example: A popular toy company launches a new drone model with cutting-edge features. They price it 30% above competitor drones knowing first adopters will pay premium pricing. In 6-12 months, prices drop to remain competitive as imitation products appear.
Choosing the Right Strategy
The ideal pricing strategy depends on organizational goals, market dynamics, competitor actions, and product characteristics.
Often a matrix approach is used with different pricing models tailored for specific products, customer segments, sales channels, and competitive scenarios.
Regular strategy re-evaluation is key as market conditions evolve. Next we‘ll discuss the core benefits of competitive pricing.
The Key Benefits of Competitive Pricing Strategies
Used skillfully, competitive pricing delivers significant bottom line results:
1. Maximizing Profits
The core benefit is greater profitability by optimizing prices based on true market willingness to pay. Competitive pricing allows capturing available profits versus leaving money on the table.
2. Maintaining Market Share
Aligning pricing with competitors protects market share by remaining price competitive. This thwarts customers switching to cheaper alternatives.
3. Flexibility & Adaptability
Regular adjustment of pricing based on market changes provides agility. Tactics like dynamic pricing allow real-time adaptation.
4. Operational Efficiency
Automated competitive pricing analysis and price adjustments drive pricing efficiency. Manual oversight needs are reduced.
5. Customer Value Perception
Competitive pricing benchmarks against other options helps ensure prices align with perceived value, preventing alienating customers.
6. Future Market Knowledge
Ongoing competitor analysis provides valuable insights into market trends, opportunities, and disruptions. This intelligence informs wider strategies.
The numbers add up – a study by Simon-Kucher & Partners found companies leveraging advanced competitive pricing achieve 2-8% higher revenues and 5-12% higher profits.
Now let‘s explore exactly how to build an effective competitive pricing process.
Creating an Effective Competitive Pricing Strategy
There is no one-size-fits-all approach to competitive pricing. Crafting an effective strategy requires:
Comprehensive Competitive Intelligence
This provides the foundation for data-based pricing decisions through:
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Competitor price tracking – Ongoing monitoring of pricing across competitors both direct and indirect. Ensures pricing stays aligned.
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Market analysis – Research into overall market conditions, growth, trends, disruptions, and influencers like economic factors and regulations.
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Customer research – Surveys, interviews, and segmentation analysis to understand varying willingness to pay and price sensitivity.
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Pricing analytics – Data mining and analysis to identify patterns, causal relationships, optimization opportunities, and projected scenarios.
Tailored Pricing Strategies
The right strategy is formulated for each product line, market, sales channel, and customer segment based on intelligence.
Agile Implementation
Established strategies must remain flexible to changes in competitive dynamics. Pricing is continually re-evaluated and optimized.
Automated Price Monitoring & Adjustments
Technology enables scalable tracking of massive competitor pricing data and swift price updates.
Testing & Refinement
Regular A/B testing fine tunes pricing strategy performance. Measurement and learning feedback loops are embedded.
Cross-Functional Collaboration
Pricing decisions benefit from the perspectives of various teams – sales, marketing, finance, analytics, etc.
Now that we‘ve covered the basics of competitive pricing approaches, let‘s do a deeper dive into some of the most essential elements for retail pricing success.
Critical Components of an Effective Strategy
Beyond foundational pricing knowledge, there are a few areas requiring particular focus to build a high-performing competitive pricing strategy.
Granular Customer Segmentation
Customer segments have vastly different willingness to pay and price sensitivities. Granular segmentation is crucial for tailoring pricing accordingly.
Common approaches include:
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Demographic segmentation – age, gender, income bracket, etc.
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Psychographic segmentation – personality traits, values, interests, etc.
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Behavioral segmentation – channel preferences, loyalty status, order history, etc.
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Geographic segmentation – pricing may vary by region.
With finite segmentation, specific competitive pricing strategies can be crafted for maximum results.
Channel Strategy Alignment
Omnichannel retailers must align pricing across channels to prevent discrepancies between stores, ecommerce, mobile, etc. Inconsistencies frustrate customers and sub-optimize results.
Intelligently tailored channel pricing – such as lower prices online to compensate for lower browse-to-buy conversion vs. stores – remains important. But glaring misalignments must be avoided.
Price Testing & Experimentation
Regular A/B and multivariate testing of different prices and promotional strategies is instrumental for optimization.
This allows finding the optimal balance of margins vs. volume at different price points for a given product. Testing also facilitates gauging elasticity.
Ongoing experimentation and measurement provides crucial learning that iteratively improves competitive pricing strategy. Testing capabilities are bolstered by pricing analytics software.
Monitoring Algorithms & Models
For retailers utilizing more advanced tactics like dynamic pricing algorithms, the algorithms/models themselves require monitoring and adjustments to sustain optimal performance as markets shift.
Key model governance practices like tracking model degradation, periodically recalibrating against new data, and overlaying human oversight prevent pricing models from becoming "stale" and ineffective over time.
Organizational Agility
The lifeblood of staying competitively priced is agility – empowering teams to make data-driven pricing decisions quickly in response to market changes.
Clunky, bureaucratic processes with slow turnaround times inhibit success. Organizational structures and workflows must enable speed. Often, this agility is fueled by pricing automation and analytics.
With the pillars of an effective competitive pricing approach covered, let‘s examine the technologies making it all possible.
Leveraging Pricing Technologies
In today‘s omni-channel retail environment with endless product variations and increasing competitiveness, pricing technology is mandatory for success.
Key capabilities enabled by pricing solutions include:
– Competitive data collection – Quickly gather and organize pricing data across competitors at scale.
– Automated pricing updates – Instantly implement price changes across all systems and channels.
– Price optimization – Sophisticated engines suggest optimal prices based on algorithms and machine learning.
– Price monitoring – Get alerts when competitors change pricing or market factors shift.
– Simulation capabilities – Model "what-if" scenarios to project results of potential price changes.
– Reporting and analytics – Uncover patterns and insights to guide strategy.
Investing in advanced pricing software provides a force multiplier for competitiveness. Retailers can implement highly agile, data-driven strategies tailored to nuances across their product catalog.
According to McKinsey, pricing optimization solutions deliver 20%+ profit lift on average. The level of sophistication and automation takes competitive pricing to the next level.
Case Study: UK Fashion Retailer Increases Profits 22%
UK-based fashion retailer tru-dition implemented price optimization from Competera. The algorithms combine real-time market data with AI and machine learning.
Results after one year:
- 22% increase in profit margins
- 13% lift in revenue
- 8% additional sales
The retailer was able to expand margins while also driving higher volume by aligning pricing with market demand trends.
Key Takeaways and Next Steps
The world of competitive retail pricing is complex but full of profit potential. A few key lessons:
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Competitive pricing is based on market factors, not just costs. Ongoing competitor and demand analysis is a must.
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The right pricing strategy varies. Different approaches suit different products, customer segments, and scenarios. Testing and flexibility are critical.
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Technology enables the level of data, automation, and sophistication required for modern pricing success.
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Build a process centered around competitive intelligence, responsiveness to change, testing and optimization.
For next steps, audit your current pricing approach:
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How extensively do you research competitor pricing and market factors? Where are the blindspots?
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How nimble and optimized is your pricing process? Are there bottlenecks inhibiting agility?
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Could pricing technology provide lift by enhancing your capabilities?
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What pricing experiments and tests could you run to improve performance?
Competitive pricing is a complex but rewarding capabilities. Take time to understand if your pricing strategy stacks up against modern best practices. With work, there are almost always opportunities to improve profitability through pricing.
Now go unleash the power of competitive pricing in your organization! I‘m always happy to chat more about this critical topic – reach out any time. Let me know if this guide provided value in advancing your pricing journey.
