Pricing Strategy: Competitor Surveys, Price Sensitivity and Marketing Segmentation

In all business models, part of the recipe for success is being competitive on price. As an every day consumer, this concept should be fairly obvious — if two competitors are selling a given product with the same apparent value, we will in most cases favor to purchase from the more affordable company. That makes sense, right? Yet I am surprised over and over again how often I discuss pricing tactics with my team of retailers and they seem disorganized or even disinterested in proactively implementing and managing a pricing strategy for their products.

Pricing is a complex and delicate subject. The way in which a store or online business sets their prices for products or services could make or break their business in the long term. My recommendation is to “spy” on your competitors in a regimented fashion (whether it’s once a week, once a month, or once every few months) to stay abreast with their price points.

Note: it is imperative that you comply with Competition Laws in your country — do your research and due diligence to make sure the means by which you obtain competitor pricing information is legal!

In the retail world, it’s usually as easy as reading the posted prices off a competitor’s public price tags to benchmark where you stand competitively. When this data is gathered legally, it is then important to decide what pricing strategy you want to implement. There are many price strategies that you can attempt and remember that pricing inherently has an element of trial-and-error — test the market and gauge your customers’ sales response.

One thing that I believe is important to keep in mind when debating your pricing tactic is the nature of your product or service. As an entrepreneur or manager, you should probe your staff and customers to gain an understanding of who buys your products. Is your product or service appealing to a price-sensitive demographic, or a luxury or premium demographic? These insights are critical in your marketing efforts as they determine the degree of flexibility you have in increasing your prices.

An Illustrative Pricing Strategy Example:

Let’s consider two shoe stores that each sell a variety of shoes to a variety of marketing segments. In the interest of simplicity, let’s assume these two stores are located in the same neighborhood with negligible differences in brand appeal, years established, etc. In other words, the main lever dictating the winning competitor’s success will be pricing.

Remember: you pay the bills with margin dollars, not margin percentages!

Shoe Store A does a price survey on Shoe Store B and uncovers the following pricing data:

Shoe Store A Shoe Store B
Running Shoe  $            11.99  $           12.39
High Heel  $            98.00  $           89.99
Men’s Dress Shoe  $         129.99  $           99.99
Sandals  $              7.49  $           14.99
Skateboard Shoe  $            45.00  $           43.00

If I was a manager overseeing Shoe Store B‘s retail operation, I would have the following constructive recommendations or questions to voice to the retailer:

  • The High Heel and Men’s Dress Shoe products — are they sold to premium or relatively less price-sensitive customers? Based on the price points and common purposes of these products, I would assume that the answer to this question is likely yes.
    • Therefore, why is Shoe Store B selling High Heels for $8.01 less than Shoe Store A? By doing this, Shoe Store B is leaving money on the table as a not-price-sensitive consumer is less likely to take their business to a competitor over a price differential than is a price sensitive consumer.
    • If Shoe Store B increased its price to match Shoe Store A’s High Heel price of $98.00, it would instantly increase this product’s top line revenue by 9% while likely retaining all the same customers! Talk about an easy sales-boosting initiative!
  • The Sandals product — by using the same logic as above, one could likely conclude that this product appeals to more price-sensitive consumers. It’s at a cheaper price point, and let’s assume it’s a budget brand sandal for the sake of this example. Remember that price sensitive consumers are more inclined to leave your store and visit your competitor for the sake of saving cents (depending on the nature of the product or service).
    • One pricing strategy would be to reduce Shoe Store B’s sandals price to as close or equal to Shoe Store A’s price of $7.49 as possible. Like this, your store would remain competitive for the price sensitive consumers. The advantage of this is to maintain the lower budget clientele, while the disadvantage is that the product would likely be selling at razor thin profit margins, perhaps putting you at risk of not generating a large return on investment from that product. Remember: you pay the bills with margin dollars, not margin percentage!
    • A different pricing strategy would be to let Shoe Store A capture the price sensitive consumer market, while Shoe Store B focuses on serving the higher-margin premium clientele. In other words, Shoe Store B could remain noncompetitive with Shoe Store A on the “budget” products while gaining more margin with fewer unit sales by focusing its pricing tactic on a more affluent target audience.

In other words, there is a degree of “gray area” when it comes to setting your product or service price. The pricing strategy decisions are to be assessed from a holistic perspective rather than a formulaic, blanket process that can be applied to all types of products in the same manner. The comments in the bullet points above are merely a few ideas that, once implemented, may or may not generate the desired results for your business’ marketing strategy — as I said, it’s a trial-and-error process. Test your market and refine your pricing strategy accordingly.

Conclusion:

I hope the article above was a valuable insight and overview on the nature of pricing strategy at a high level. I will unpeel the layers of the proverbial onion that is pricing in future blog posts.

If you have any input or care to challenge my hypothetical recommendations in the case study above, please Leave a Reply below! I love to hear from my readers.

Thanks for reading and do not hesitate to email me if I can help you out or answer any of your business questions. I don’t bite!

Cheers,

-Dylan

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