In free markets, competition and price pressure is the norm not the exception, and that competition will limit your latitude for pricing. When faced with lower prices, a competitors’ gut reaction to price changes is to lower prices as well, but the cost of price concessions may be higher than the cost of customer losses.
Experience will temper these beginner instincts over time, but there must be an easier and less costly way to identify a competitive response to prices than the school of hard knocks. How should you react to your competitor’s prices? Perhaps we need a refreshed guide..
What is ‘Competitive Pricing’?
The competitive pricing definition is: ‘the process of selecting strategic price points to best take advantage of a product or service based market relative to competition’.
Naturally, competitive price points can impact your own pricing strategy in more ways than one. More often than not, when a product has been on the market for a while more and more similar offerings will begin to emerge. When this happens, and the price for your product or service has reached a point of equilibrium, competitive pricing is the next go-to strategy. As the name suggests, this approach to pricing involves setting prices relative to competitors in order to take the best advantage of the competitive market.
Of course, the by-product of this is a certain amount of price pressure and, sometimes, an all-out price war. The key to effectively navigating the pricing landscape, without devaluing your product or service, is knowing when and how to respond.
Responding to Competitors’ Prices: The Competitive Price Reaction Matrix
The Wiglaf Competitive Price Reaction Matrix calculates the proper competitive response to price pressure. The principles of competitive advantage and pricing power define the dimensions. To win, the firm must merely earn more profits than its competitors. Second place goes to the survivors who will live to compete again in the next round. Losers are the firms that go under. Given these ground rules and objectives, we can identify the optimal moves dependent on the firm’s position.
If the firm’s offer is more attractive to customers than its competitor’s, then the firm has competitive pricing power. That is, the firm may be able to maintain or increase a positive price differential between its offer and its competitors without losing market share due to the customers perceiving that the firm’s offer delivers more benefits than its competitor’s.
If the firm’s profitability for the impacted customers is higher than the profitability which the competitor could achieve with those customers, then the firm has a competitive advantage. That is, the firm can use that competitive advantage to either attack a competitor’s customer base or defend its own customer base with a price reduction more profitably than one’s competitors during a price pressure war.
There are four stances a firm should take in response to a competitive price threat depending on its situation: Ignore, Defend, Mitigate, or Accommodate.
If the firm both earns stronger profits in serving the impacted customers (possesses a competitive price advantage) and customers perceive the offer as more attractive (possesses competitive pricing power), then the firm should ignore direct price competition and carry on its strategy as it sees fit.
If the firm earns stronger profits in serving the impacted customers (possesses a competitive advantage) but customers do not perceive its offering as more attractive (lacks pricing power), then defending its market position with a measured price reduction may be merited. The margin reduction may be less costly than the potential loss of market share.
If the firm does not earn stronger profits in serving the impacted customers (lacks a competitive advantage) but customers do perceive the offer as more attractive (possesses pricing power), then the firm should mitigate price competition through reiterating and re-communicating its benefits.
Finally, if the firm both does not earn stronger profits in serving the impacted customers (lacks a competitive advantage) and customers do not perceive its offering as more attractive (lacks pricing power), then the firm will have to accommodate share and margin losses in the short term in the hopes of improving its value offering for the next cycle of competitive engagement.
Not all of the positions are equally attractive. But in real life, firms don’t always have pricing power and / or a competitive advantage, and they can’t win every customer profitably every time. But, they should be able to live to fight another day.