As you will know, on the long run, optimal prices need to lie between your costs and what customers are willing to pay. The latter is determined by two factors:
- the value of the product to your customer
- your competitors’ prices for that product
Between these two bounds, you have room for choice and depending on your strategic goal, you will price higher for a higher margin or lower for more sales. This is shown in the figure below:
While many retailers used to calculate cost-plus prices, with the high transparency that price comparison sites and marketplaces bring, ignoring your competitors is a terrible idea.
Focus on costs and competition
While you should absolutely pay attention to your costs and competitors, for most goods and in most situations customer value plays a less important and less dynamic role. Unless you are a monopolist, competitors’ prices are likely below what the market would bear anyway. Therefore competitive prices trump customer value in most cases.
And that’s good news, because measuring customer value with price experiments is rarely feasible, unless you have the traffic of Amazon. It could take the whole season to come up with statistically valid results and then these results are often not better than the brand’s recommended retail price.
On the other hand, price lower than your costs and you’ll notice it on your bottom line immediately. Price higher than your competitors — modified by your respective brand value and taking into account availability of course — and your customer acquisition via price comparison sites will come to an abrupt halt immediately. Clearly, costs and competitive prices are the areas to focus on.
Automate and outsource data collection …
Today prices change so fast, that monitoring your competitors costs too much time and effort — unless you automate the process.
We highly recommand you to outsource the data collection to a service like Price API, because scraping is likely not one of your core competencies.
We can collect competitive prices from price comparison sites and marketplaces like Amazon, Google Shopping or eBay in real-time. That’s what what our team of experts specializes in.
… but inhouse pricing
At the same time we also recommend you to inhouse the actual pricing, because this is what you are probably good at. Optimal prices are a critical competitive advantage and price is the most influencial profit factor.
While it would be nice to be able to outsource pricing to a ready-made system, you would be giving away your competitive edge. You just can’t use the same system as your competitors and expect it to work better for you than for them. By using a ready-made pricing software, you would declare prices a mere hygiene factor.
But it can be so much more for your business. We have seen customers growing their margins by eight percentage points within three weeks of introducing competitive pricing with Price API and others nearly doubling their eight-digit revenue within a year.
It’s time for you to implement your pricing strategy. With a strong partner in data collection.