Knowing how your prices stack up against competitors’ is a good step to take but how can it be done to scale? What competitive price data should be collected and how do you analyze and visualize the information for maximum insights? Follow these best practices from Dan Cakora, Business Consultant at Vendavo.
Recently I spoke with a long-time customer of Vendavo who wanted advice on how to collect, analyze, and visualize competitive price data over time. Capturing competitive pricing can be tricky in B2B, so we set out to provide a preview of the possibilities this type of data collection could offer.
Are you considering analyzing your competitors’ price data? Here’s a quick how-to for ensuring you get the most insights from your efforts:
- What data should be collected?
- How do you compute a price difference?
- How can you visualize competitive pricing data so you can make smart decisions?
What Competitive Price Data Should You Collect?
Consider starting with capturing the following data fields:
- Date &Time – Identify moments in time so you can see trends develop as your data set grows
- Competitor Name & ID – This is especially important if data is being collected from multiple sources
- SKU & Product ID – This could include either the Manufacturer Part Number (common for distributors) or the competitor part number that corresponds with your part number (common for manufacturers)
- Competitor Price – Most times this will be the list price rather than a net price
- Unit of Measure – Many industries need to calculate a common UOM to make valid comparisons
- Inventory Level – Optional field that can be useful when comparing product availability
- Freight – Note this may be bundled in the price or split out as a separate line item
Do not consider this an exhaustive list. Attempt to collect as much data as you can, assuming the cost is not astronomical.
How to Compute Price Differences
Now that you know what data needs to be collected, you need to define how you will compare your price to the competitor price. Nominal price differences are easy to compare.
Here’s an example:
If your price is $100 and your competitor’s price is $90, then the nominal price difference is $100 – $90 = $10. This is helpful on an individual SKU level, but it becomes difficult to maintain when aggregating multiple SKUs.
When it comes to computing the relative price difference for a group of products, use this equation:
For this SKU, if the competition is priced at $90 and you’re priced at $100, then the competition is 10% below your price. If a second competitor for that same SKU is priced at $105 and you’re still at that same $100, then that competitor is priced 5% above you. Calculating the price differential this way will make interpreting charts easier, which we will get to soon.
5 Ways to Analyze Competitive Price Data Trends
Once you’ve collected competitor pricing data, the next step is to analyze it. Here are five ways to visualize the data to help you understand how competitor prices are changing over time.
1. Price Leader
The chart below indicates your price change (indicated by the blue line going up) that results in your competitor mirroring your price with a change of their own. Critically, they make sure to never exceed your price (indicated by the red shaded area).
If you see this trend, then you know that you are a price leader, and your competitor is a price follower. If you are okay with this arrangement, then continue to push price and monitor your competition to see that they follow suit. If this arrangement is not agreeable, then periodically (and temporarily) drop your price. The competitor may follow suit right away, or they might hold their pricing as the new pricing equilibrium is reached.
2. Steady Price
On this chart, you held your price constant over time, while your competitor made periodic price increases, going from lower price to higher price. Is this a good or bad thing? It depends, of course.
Here’s what it depends on:
- If your product or service offers a premium value but does not collect a premium price, then you’re leaving money on the table.
- Perhaps you’ve been more diligent in managing your cost structure and can afford to keep prices flat. If so, then strive to grow volume (and therefore revenue) due to your advantage.
- Maybe this trend is a result of an evolving market. Has the competition introduced new services that support their product and can command a higher price? Have they introduced a new generation of a product? There could be many explanations, and this chart should be the trigger for investigating the root cause of the trend.
*Important Note: For the next three charts, the y-axis is now the % price difference rather than the nominal price difference.
3. Widening Price Gaps
In this example, you and your competitor used to be priced close to parity, but the gap between the two is widening over time. Usually, it is a good idea to charge a premium where your value proposition can support it but remain vigilant so that the gap does not become too large.
This example is the inverse of the chart above. You have always been less expensive than your competitor, and that gap is growing over time. This is probably evidence that you are becoming underpriced and you are leaving money on the table. Strongly consider a price increase to close the gap, assuming there have not been vast structural changes that could explain the decoupling.
5. Fluctuating Prices
Charts like this are often found in industries where seasonality or promos are common. The wild fluctuations in relative price are usually a response to market repositioning. Companies decide they want to own a “power window” (for example, selling TVs in the lead up to the Super Bowl) and heavily promote their prices to make sure they are the lowest cost provider during that time. The rest of the year they are happy to charge a premium when customers aren’t as price sensitive.
Best practice is not to engage in a destructive price war with a competitor determined to lower prices. Find other times to dominate or compete on value rather than price.
Deciding how to price your products or services is a difficult task. While understanding and analyzing your competitors’ pricing is critically important, it’s also but one element to consider in your strategic decision making.