Competitive Implications of Pricing

An aspect of pricing that is often low-balled is the effect of your product’s pricing on the competitive environment of your product category. Marketers tend to believe that they can, on a whim, either increase the price or decrease the price, and the rest of the market will not notice or make a big deal about it. When, in fact, your pricing policy actually sends important signals to the marketplace, which your competitors are keeping a close watch on. If you do not look 2-3 steps ahead and anticipate your competitor’s reaction to your pricing changes, and then set prices accordingly, you could be in for rather undesired results down the road.

There are important scenarios you have to explore and questions you have to answer in order to convince yourself and your management that your price change proposal is in fact prudent and profitable. Some of those scenarios and questions are –

1. What is the objective/driver behind the price change? Market share or Profitability or both?
2. Is the price change helping achieve these business objectives?
3. Who is this price change targeted towards?
4. How will my competitors react? How can I influence these reactions?
5. Am I trying to send a particular message to my competitors?
6. How do I ensure that my competitors are not threatened by the price change?

Discussing and evaluating the above questions and then defining a balanced pricing strategy will go a long way in ensuring that you are getting the results you are seeking. A common myth in the market place is that raising the product price is a bad idea and that it will reduce your net income. But let’s not jump to conclusions. Why not do an analysis and understand what percentage of business you would be losing if you were to raise the prices. Usually you will find out that you can afford to let go of some customers and still meet/beat your net income targets by raising your prices by up to 30% (making some basic assumptions here). Obviously, your product has to be perceived as being somewhat valuable and differentiated in the marketplace. If your product is a commodity, don’t even bother.

You can also do a “price banding” exercise where you can try to understand the various price points at which your product is being sold at and then address the root-causes leading to price points that are undesirable. If you are selling through a distribution network and providing incentives to distributors and/or consumers of your product to increase the sales rate, there are going to be different price points. Gather the pricing data from the sales history and then draw a histogram to see which price points are the “outliers”. Then you can evaluate and determine whether or not the outliers are justified or if you need to take a corrective course of action.

Game Theory is always a neat technique to understand how the competitors are going to receive and respond to your pricing decisions. Think Chess! When playing chess, you are required to think 2-3 moves ahead of your opponent. If I do something, then they will do this other thing, hence I must do this third thing, and so on. Thinking this way will help you be ahead of your competition and mitigate such risks as outright price wars. It’s not just your competitors that you should be worried about but also your customers. What if you’ve already been selling the product for a few months and now you decide to reduce the price. What will your current customers think of such a move? Will you lose trust and repeat business? Will they hate you for charging them more? Should you send then a refund check or maybe a discount voucher towards a future purchase?

Finally, there is always plenty of room in the marketplace for players who have a differentiated set of product offerings. A reasonable number of players can co-exist in the marketplace. Every pricing move that your competitor does should not be taken as a threat necessarily and does not have to be matched by a move on your part. You need to understand what is the intent behind such a move and how does it put your product offerings and position at risk. If you are the one resetting the price, make sure that you are sending the right signals to your competitors. Conference and Expos are perfect forums to talk about some of your upcoming product launches and informing the market ahead of time on your intentions and target audience. Nobody likes surprises, especially when they are your competitors.

Somebody once said – It’s the dumbest competitor that you need to watch out for because they are the ones who will set wacky product prices by acting irrationally. Then you are left wondering what are these guys thinking and how should I be responding to such a move. The smarts you know will act rationally.