Knowing the price of your competitor’s products is critical information for running a successful business. Are your products more expensive? Cheaper?
One fact that complicates competitive pricing is, not all competitive products offer exactly the same features or capabilities. What you need are pricing benchmarks that take into account the variety of features, bundles and discounts to get to a real reference point for your pricing.
For example, let’s assume we run a car repair service. There is a lot of variety in our competition, as there are many different kinds of cars, services, and business models. As with any benchmarking, the first step in price benchmarking is to segment your competition to ensure you can compare prices effectively. Let’s segment the competition for our car repair service in a way that will help make sense of pricing:
- What are they selling? Repair services that focus exclusively on oil changes will have lower prices, as they enjoy economies of scale. Full service shops, on the other hand, can charge a premium for the convenience of a one-stop-shop. You need to understand what the customer is buying for a given price, so you know how it compares to your prices.
- Who are they selling to? A repair service that services car fleets will have fundamentally different pricing than one that services consumer vehicles, because they can provide bulk discounts. Even if you are targeting the same customers, different customers in that segment may have different value propositions and different spending capacity. The better you understand the specifics of that customer segmentation, the better idea of how you know their pricing compares to yours.
- What is their business model? Some repair services primarily provide service to insurance companies, which allows them to charge lower prices in return for more business. Others spend heavily on direct marketing, which drives down their contribution margins. Understanding how your competition’s business model works is critical to understanding how their pricing affects their model.
With those segments in hand, we can create a number of different benchmarks to compare our business. We might not care about how we compare to bulk-pricing for car fleets, or if we only service a certain car brand we might not care about others. You will likely end up with 2-3 benchmarks for the segments of customers that are most closely related to your business.
Whatever segments you choose, you can sanity check them by asking your customers what other providers were in their selection sets before they chose your business. Often you will be surprised that indirect competitors pop up on those lists, and you can adjust your benchmarks accordingly.
Remember that the prices listed on a competitor’s website may not be the actual price the customer pays. There may be discounts available, or the competitor might have other ways of generating revenue that are indirect (such as selling services or warranties along with the product). Interview customers (both yours and theirs) about advertised pricing and the actual price paid, to get better data.
Tomorrow we’ll wrap up by talking about how much your competition knows about you!
Quote of the Day: “Competition has been shown to be useful up to a certain point and no further, but cooperation, which is the thing we must strive for today, begins where competition leaves off.” ― Franklin D. Roosevelt