Pricing Strategy for Competitive Market
Things to consider in determining your product pricing
As today’s market keeps growing and shifts its distribution toward omnichannel, many producers struggle with price competition. Unlike the traditional competition in offline channels, now the online channel allows the customers to sort choices of items they need by the lowest price. Thus, how can producers distinguish themselves from the immense number of competitors? How can we attract the market and keep generating sales to be sustainable?
Market research
Market research is meant to analyze the context of the market landscape. First things first, we need to understand what our potential customers need. We need to understand their journey in searching and purchasing product, what are the potential pain points, also what problems do they still have and need to be solved. By performing research on those, we are able to identify what they value and what should our product offer to them.
Not only to understand potential customers, but there is also another thing that must not be neglected in researching the market landscape: to know our competitors as well. As said by Sun Tzu, know your enemy! We don’t want to spend most of our efforts in developing a product that already exists in the market. We don’t give enough reason for the customer to purchase our product then. As a seller, we need to know our competitors before offering a certain price for our product. Do the due diligence to benchmark our price with competitors, as well as regarding the product features and quality.
Generally, there are two major strategies to position our product to the market: Cost leadership and Differentiation.
- Cost leadership means the product competes in the market by offering a relatively lower price compared to competitors.
- Differentiation means the product may not have the lowest price in the market, but it has one or more added values that distinguish it from the competitors. The added value should be something that is needed by the market, i.e. higher quality, more sophisticated design, well-known brand image, etc.
In a narrow market scope, such as a niche market, there are also focus strategies. For example, the market for low-calorie foods. A healthy fried chicken restaurant may not take McDonald’s as its competitor, since both have a different target market. The low-calorie food market then can be segmented more specifically, e.g. low-calorie foods for vegan consumers.
After being aware of the types of positioning strategy in the market, we need to know where our product and competitors belong! A positioning map can help to give a more specific picture, about which strategy is the focus of our product development and which certain competitor that is directly competing with ours.
From the example below, KitKat should watch for M&M’s and Mars as its direct competitors, while they may not be bothered by Lindt. Since the positioning between KitKat and Lindt is relatively far, they are considered to have a different target market. Producers should be aware of what strength do they have, whether the resource or capacity to produce at a low price, or the ability to deliver high quality or unique features to satisfy their customers. Moreover, note that we should not fall into the bottom-right quadrant (a pricey yet low-quality product), so do check your positioning compared to the competitors periodically!
So, we’ve known where our product positioning is…
- Cost leadership
If our product is positioned on the left side of the map, then our competitive advantage compared to competitors is the low price! This means that customers are mostly interested to purchase our product because it is the most affordable among the others. A low-priced product means we need to produce it at a lower cost, so that this usually leads to average product quality.
When speaking about cost, we need to be aware of the cost structure that we need to produce our product. Generally, the cost structure consists of fixed cost and variable cost.
- If fixed cost is the one that is driving up the overall cost, then we may need to think about how to optimize the fixed cost. For example, we need to invest in a machine for production, so the cost will be optimum if the machine operates in a full capacity for each production cycle. This is what is called economies of scale, that as market demand arises, we can produce at a lower cost. Hence, we should consider intensifying marketing activities to boost sales, and then this will lead to lower fixed costs.
- If variable cost is the one that is driving up the overall cost, we can try to do unbundling: to break down our product into each product level and analyze what is the “minimum viable product” for the customer. Minimum Viable Product (MVP) is a stage in product development in which the product has the minimum features to satisfy the essential customer needs. In this stage, any other additional feature is ruled out. To determine the product levels, we can refer to the Five Product Levels by Philip Kotler. The farther the product level from its core benefit, the less essential it is for the customer (not necessary but nice to have), thus it can be eliminated to lower costs. For example, some retailers start to promote the self-service station to eliminate service costs. Product warranty can be shortened from 3 years to 1 year to lower costs. Distribution channel can be moved from offline to online to cut distribution costs and profit-sharing with retail chains. However, don’t forget to do the due diligence to research our customers, and understand how would each change impact their experience and satisfaction. The process of unbundling our product may lead to creating potential pain points for our customers.
- Differentiation
In opposite to the cost leadership, the differentiation strategy means we prioritize to provide added values to customers: What distinguishes our product among the others? Is it the best quality, a unique feature, or an excellent service? We might explore within product levels as well, such as augmented product — should we provide consultation service to help customers in choosing our product? Or potential product — is there any additional feature that we can add to avoid churn and increase loyalty? For example, offering customers to have a personalized product, giving loyalty rewards, hosting community gatherings and social events, etc. Moreover, the differentiation strategy also shapes our brand image, so that our brand can have an added value for the customers. The important key in developing an additional feature for the product is to find the Product-Market Fit, which is to make sure that it is a feature that can answer what the market needs. The differentiation strategy allows us to position our product at a relatively higher price and still manages to capture the market.
Data analytics to step up the game
- Price elasticity
Another thing that we should be aware of is to know how our customers will react to price change. Sometimes, we will face a situation where the price of our resources increases, so that we need to adjust our product price as well. Or maybe we just want to develop a new product line or add a single feature, thus we need to determine the pricing. By bringing data analytics into the game, we can track how is the movement of customer demand along with the price change? If we raise the price by 10%, will the demand decrease with the same percentage or will it decrease by 20%? Or will the demand stay the same? If the demand stays the same — this means that the price is inelastic, thus we should not worry when we increase our price, but conversely, this may indicate that promotions such as discounts may not work well to generate more sales. Conversely, if the demand decreases double than the price, this means that the price is relatively elastic — thus we should watch out when we try to raise the price.
- Customer acquisition cost (CAC)
Customer acquisition costs (CAC) or marketing expenses should never be neglected. A great product with many advanced features is nothing if it has no demand from customers. Every product must be promoted to the market to acquire new customers! In terms of marketing, products with unique features that are developed with differentiation strategy may have the advantage of earning promotion from customers, such as through word-of-mouth. Customers may talk to their friends about the uniqueness of the product and/or how it can satisfy their needs compared to the competitors. Meanwhile, products that compete by maintaining low prices (cost leadership) may struggle more to earn the word-of-mouth. Thus, we will need more costs to market the product and to acquire new customers.
The CAC is not counted as the cost of goods sold (COGS), but it should be calculated in determining the product price. This might be quite tricky for producers who try to compete with cost leadership strategy and grow profit from sales volume. Hence, we need data analytics to keep track of customer acquisition activities and how those activities can generate more demand. Furthermore, data analytics help to determine how much is the CAC, then we can continue to determine the product price and profit margin.
In conclusion, there is always a trade-off between cost and quality. If we want to market a product at a lower price, we must lower the cost and only offer standard quality. Conversely, if we want to market a high-quality product, then we can hardly maintain the price to be the lowest in the market. To manage the trade-off, market research is the key activity that must be performed, so that we can understand what our customers need and determine the most suitable strategy. Therefore, whether we decide to implement cost leadership or differentiation strategy, we can develop a product that achieves Product-Market Fit and know how to position our product price among the competitors.
