Why you shouldn’t use your competitor’s pricing as your benchmark?

This is a guest post by Grishma Govani. Grishma builds and grows communities at early stage startups. She focuses on growth and customer retention by way of word of mouth, analytics and user behavior. You can find her on twitter as  @StrangeLoops


As entrepreneurs, most of us have studied our competitors thoroughly at least twice: once before we start building a product and once before we set our pricing. Before we start building a product, we gauge the market by understanding what products our competitors are selling, where they are lacking and what their customers are unsatisfied with. When it comes to pricing, most of the time, we wait until we are almost ready to ship our MVP.  At this stage, we tend to price our products proportional to the amount of value we are adding over our competitors.

For example, if we believe our customers will save time by using our product over our competitors, we will calculate how much time we are saving our customers. We will also try and understand how much that extra time is worth to our customers. The more time our customers save, the more value our product creates leading to a higher price point.

 The problem with this pricing method is it is a very short-sighted strategy. By using our competitor’s price as our benchmark, we will completely miss seeing all the new ways our product can possibly provide value to our customers. The portable bar code reader was one such product. The company that first made them used their competitors as benchmark to price the reader. They priced their product proportionally to the amount of time they were saving customers over their competitors. But they missed understanding how else they were adding value to their customers by completely allowing them to redesign their supply chain and logistics. Comparison pricing led them to undervalue one of the most innovative products in the market.

One effective way to address undervalued pricing is to get a full picture of where you plan on adding value even before you start building the product. You can start by mapping your customer’s minimum expectations and your competitor’s performance on the following three scales – product performance, operation/cost excellence (price) and service/community as shown in Dr. Barbara Kahn’s chart below for leadership strategies.

strat_lead

Based on this map, you can design a product strategy to add superior value on one of the three scales where customer’s expectations are high but are not being met. You, also, need to make sure your product is good enough on the other two scales too. This will form your hypothesis for a market strategy which you can then validate.

Evaluating your product along these three scales is a great way to understand value pricing while you solve actual problems your customers will pay a premium for.

Further Reading:

Read how a very innovative portable scanner completely missed the boat on pricing when they only looked at their competitors’ prices. Also, it gives an in depth look at how to develop your pricing. (http://www.mckinsey.com/insights/marketing_sales/pricing_new_products)

Here is a good article on why entrepreneurs are bad at finding competitors and tips on how to find your competitors. (http://www.berserkia.com/blog/doing-a-competitive-analysis)

2 thoughts on “Why you shouldn’t use your competitor’s pricing as your benchmark?

  1. Excellent Article! I agree with a lot of things in this blogpost, especially about how we undervalue our product before we even sell it to a potential customer. I also believe there are 3 magic ingredients to the pricing “recipe” :

    First – Focus on content , not price . To paraphrase Ramit Sethi : “Price your product high and don’t worry about similar products out there. Instead , focus on adding value to the product which distinguishes it over the other products”. I believe in this strategy because there’s also a subconscious decision making factor associated with this. For example : When a person wants to download an app to do a function (let’s say stream music), he/she has a choice between a million free apps , a few low priced ones , fewer moderately priced ones and a handful of premium priced options. Out of curiosity atleast, the user will click on the higher priced ones and check it’s features and see how it compares to the cheaper/free ones. So it’s upto the developer to pack the paid app with some kickass features and charge premium for it.

    Second – Intensive testing. Release different versions of your product , with different price points to either an alpha or a beta audience and monitor the results. Figure out imaginative ways to find out if a potential customer is ready to buy an expensive version of the same product.

    Third and final – People have been buying unwanted unnecessary stuff for a LONG time(read:vacuum cleaners and sewing machines from 2AM TV Shopping shows) . So we shouldn’t underestimate the power of effective marketing to sell a product at the price that you want it to sell at. Also, we shouldn’t overestimate the critical factor in our audience ;)

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