A competitor oriented pricing objective sets prices in response to competitor pricing decisions. This type of pricing strategy is common in hierarchical markets, where there is a good / better / best ranking of potential products. It is also common in highly transparent commodity markets. Both situations require you to carefully manage your risk of losing volume due to price.
Pricing Discount Products
Our first example involved a product everyone needs. I’m talking about rolled gold. The one thing you absolutely need on a camping trip. I worked for a company that made toilet paper.
We were on the low end of the market. Scott tissue was above us and had a stronger brand and nicer paper. This mean we had to set our prices relative to Scott. The gap between our price and Scott drove our sale volume. This same dynamic applies to many other brands.
In this environment, consumers have a choice of buying the nicer brand or the cheap one. While this varies by customer segment, it can be analyzed as a mathematical function. We used this to predict sales (very accurately).
Small Distribution Community
Other markets are effectively a locked room. There are finite number of competitors and they all talk to each other. Or they post prices on their website. In any event, managing signalling becomes important when selling in these markets.
It is important to manage conflict between distributors. This become a real issue when one of your distributor reps gets embarrassed on price by another distributor on the same item. If this happens often, they will stop doing business with you.
Limiting Incentives To Enter
Jeff Bezo’s has a famous quote: “Your margin is my opportunity”
If you allow high margins to exist in your market, you are luring competitors. Especially if these are a matter of public record. And when competitors come, you lose.
One potential strategy to respond to this is to cut margins and pass the savings to customers. While this lowers your short term profit, it reduces your exposure to potential disruption.
Executing this idea requires an awareness of a new entrant’s cost structure. You are balancing the cost of them entering the space against your lost profits from the margin cut. You also need to estimate of the likelihood of them being able to pull it off.
Outright blocking their profits is inadvisable. Trim them back, so it isn’t worth the risk.
If you are building a premium brand, you may find discounting doesn’t work. Customers expect to pay more for a premium brand. Why disappoint them?