Adapt Your Prices According To The Competition
Align or Determine An Optimal Gap
To set the right price, we can refer to the costs of competitors’ products.
- A company may seek to align,
- or, on the contrary, determined an optimal price difference concerning its competitors.
When should you seek to align your prices? When the price elasticity of demand is very high, it is common to seek to sell one’s products at the same price as one’s main competitors (sometimes referred to as “market price”).
In other circumstances, one can estimate the optimal distance to establish concerning competitors, depending on the product’s characteristics and position in the market.
- If, for example, the product sold is of superior quality or benefits from better notoriety/image, an additional price can be set to be requested from customers taking into account these advantages.
- If, on the other hand, a product suffers from certain handicaps compared to competitors, then a price should be set at a level slightly lower than that to compensate for these handicaps.
The Case of e-commerce: a Dynamic Pricing Strategy That Can Be Automated
It is possible for companies that sell online to automate their strategy with dynamic prices that vary according to competing prices.
To do this, all you have to do is equip yourself with software. Such tools allow you to put “rules” on your prices based on your competition, your product category, and the margin levels you wish to maintain.
Position Yourself As The Highest or Lowest Price
One approach to determining the price of its products can be to position itself as the most expensive / the least costly in its market.
Let us examine the two options in turn.
Highest Price Strategy
It is a strategy that can be used when the company wishes to:
- maintain a certain level of profits, without concession,
- increase overall profitability,
- improve the brand image by playing on the perception between price & quality
This strategy requires having a product that justifies its premium price by an innovative patent or if it provides a remarkable consumer benefit.
Lowest Price Strategy
Having a “lowest on the market” price policy can be a long-term strategy (to reinforce a marketing positioning) or a short-term strategy (guaranteeing the lowest price for a given period, such as during a chestnut tree, for example ).
The objectives pursued by a company that practices the lowest price strategy can be:
- quickly gain market share,
- to defend its market shares in the event of the arrival of new entrants,
- to expand its distribution network.
Adopt a Pricing Policy Based On Your Production Costs
A Pricing Strategy That Consists of Adding a Margin to its cost price
This pricing strategy depends on the costs that the company must assume to manufacture a given product. This involves adding a margin that is deemed reasonable to the unit cost price of the product.
A More Complex Pricing Policy Than It Seems, With Weaknesses
Despite its “simplistic” appearance, this strategy can be complex to implement. Indeed, what should be included in the cost price of a product?
For a trader, the price is simply the price at which the goods are bought before being resold. It is then enough to add a certain margin percentage or apply a multiplier coefficient.
On the other hand, if the company manufactures a product, the calculation of its cost price is more complex. Indeed, production costs are broken down into unit variable costs plus a share of fixed costs. However, the number of fixed costs allocated to each unit depends on the number of units sold, which can never be predicted very precisely.
Another limitation of this pricing strategy is that it does not consider the impact of price on sales volume. This forces the company to correctly calculate its breakeven point, i.e., the activity level for which the company balances its operations (the profits generated by sales exactly cover the costs incurred).
Skimming Price Strategy
A High Price Initially, Which Decreases Over Time
A skimming pricing policy involves launching a product by setting a high price and then gradually lowering it over the product’s life cycle.
This strategy allows the company to generate strong margins when the product is in the launch and growth phase and then extend its distribution when the market matures.
When To Use a Skimming Pricing Strategy?
The skimming pricing strategy is relevant when the product launched is different from its competitors (through innovation, for example). It is easier to justify a high price to customers in such a situation, such as distributors.
The basic assumption is that the elasticity of demand will be low at product launch since consumers will have no points of comparison. It will only be when the competition begins to copy the product that the price will start to fall gradually to continue penetrating market segments that are more sensitive to the price variable.
The Penetration Price Strategy
Sacrificing Short-Term Profitability To Gain Market Share
The opposite of the skimming pricing policy is the penetration pricing strategy. With this approach, the company attaches more importance to maximising its sales volume than maximising its short-term profitability.
When To Use a Penetration Pricing Strategy?
A penetration pricing strategy makes sense if:
- it is necessary to stimulate demand in a completely new market,
- the elasticity of sales concerning price is substantial,
- a significant increase in production makes it possible to lower the cost price of a product significantly
- the brand wishes to dissuade competitors from entering the market segment it occupies,
- by-products occupy the high-end part with a high price but a relatively low price/quality ratio.
A Pricing Policy That Targets The Psychological Price
The Concept of Price Acceptability Zone
The consumer sometimes tends to associate a low-quality image with a low price and a high-quality image with a high price. However, he is not willing to pay an exorbitant price.
Therefore, the optimum psychological price is in a range limited at the top by an income effect and the bottom by a quality impact: this is the zone of acceptability of a fee.
There is a method for determining the acceptable price (or psychological price) for the most significant number of consumers.
How Do You Determine The Psychological Price of a Product?
A survey should be carried out on a representative sample of potential customers. This survey asks two questions:
- Above what price do you consider this product to be too expensive?
- Below what price do you believe this product to be of poor quality?
The survey results show the percentage of people who consider the price acceptable, i.e., neither too expensive nor too low. This percentage is given by the difference between the cumulative curve of minimum prices and maximum prices. The optimum psychological price corresponds to the most significant difference between the two curves.
Although attractive to the marketer, this pricing strategy has two main limitations:
- Respondents’ statements are not always predictive of their actual behaviour at the time of purchase.
- The method does not take into account the influence of competitors’ prices.
The Pricing Strategy Articulated Around The Product Range
The price of a product influences its sales and those of the other products in the range.
Sometimes the pricing policy may aim to facilitate the sale of other company products.
However, the different models of a range are sometimes in competition. In this case, the price of a product has an influence not only on its sales but also on those of others.
The Call Price Strategy or The Case of Products That Require The Purchase of Ancillary Supplies
It is possible to set a meagre call price for an entry-level product (on which the margins earned will be low) to have the same customer discover and sell other more expensive models.
Another variation of this strategy applies when a product requires the purchase of ancillary supplies. This is the case, for example, of printers, which can only be used by purchasing ink cartridges. In this case, a company can promote the equipment of the product by an aggressive pricing policy and catch up on the margins achieved by the “consumables.”
Due to the dual influence that price has on sales volume and profitability, defining the “right price” is a significant marketing challenge. In some cases, it may be wise to start by setting a target price, then deduce the product attributes and the rest of the marketing strategy based on this variable.
Let’s not forget that other factors can also influence your pricing strategy:
- the effect of experience which, thanks to economies of scale, reduce the cost price of a product as the quantities produced by the company increase
- the price elasticity of final demand, which measures the influence of the selling price of a product on sales volumes