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The dangers of competitive pricing intelligence

March 19, 2012 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

Many businesses, particularly larger businesses, feel that competitive pricing intelligence is essential to their success. Is that true? Or will their exploration lead them into dangers they haven't anticipated?

I'll let you decide. Here are behaviors that companies exhibit once they've gained competitive pricing intelligence. They:

• Sweat blood over whether or not to raise prices 3 percent to 5 percent
• Focus on price rather than value in developing their strategies
• Highlight pricing in the marketing messages
• Look for ways to cut costs only to give them up in their pricing
• Add costly enhancements to gain competitive advantage

Let's explore each of these in more detail.

3 percent to 5 percent increases

Companies will fret over these insignificant price increases because their competitors aren't raising their prices. What these companies consistently overlook is the readily-available price data that shows how much buyers pay for what they truly want. Here are a few examples:

• Image (large ticket item) - Mercedes S-class sedan buyers pay over 7.5 times the lowest price alternative sedan
• Image (small ticket item) - A sweater at Nordstrom will cost 12 to 14 times one at Walmart.
• Innovation - Early adopters pay 3 to 4 times what the mass market pays and 12 to 13 times what the late adopters pay.
• Time savings - Consumers pay 3 to 4 times their hourly rate of compensation for additional recreation time while companies will pay up to 50 percent of the additional profits they can generate from increased productivity.

Given these multiples and the fact that roughly 85 percent of customers are value buyers why would you fret over a 3 percent to 5 percent increase? The only reasonable answer brings us to point #2, focusing on price rather than value.

Price vs. value

Companies that rely heavily on competitive pricing intelligence almost inevitably focus their attention on how to compete on price, not the value that customers desire. Consequently they devote little time, effort or energy to monitoring their customers' changing interests or, better yet, their customers' customers' interests.

When we stop adapting our offerings to the changing needs of our customers our offerings inevitably get taken for granted. You know yourself that you may be WOWed by the first experience, still amazed by the second experience, but by the third you've come to expect that level of quality/service and it's now a commodity in your mind.

Companies fall into this trap more readily when they focus on their competitors' pricing rather than the value their customers desire. This result becomes even more obvious when we look at the company's marketing messages.

Marketing messages

A company that is relying on competitive pricing intelligence's ads, whether print, TV, radio or social media, will typically include language like "at an affordable price," "at a competitive price" or "the lowest price."

This language creates several problems. It:

• Focuses the buyer's attention on price rather than value
• Offers no real differentiation between the value propositions of your offerings vs. your competitors' offerings
• If you do offer differentiation, at the very least you've likely confused the buyer with your low price; at the worst you've discredited your claims of having a superior offering.

Are these the outcomes you desire from your marketing? I doubt it.

When we focus our customers' attention on price we inevitably feel pressure to get our costs down which brings us to the next danger.

Cost cutting

Now I'm not averse to improving productivity which has the effect of, ultimately, bringing costs and pricing down. That's a part of the normal product life cycle which, in today's world, is dramatically shorter than it was 20 years ago. After all, it's through productivity improvements that our lifestyles improve over time.

What I see all too often is that businesses, in an attempt to bring their costs down, attempt to strip out the value that customers once received to be "competitive" in their pricing. Consequently customers become disenchanted with the company's offerings and seek alternatives, even if they have to pay more for them. Regaining these customers' loyalties is extremely difficult and often involves further reductions in price (margins) while costs are returning to pre costing-cutting levels.

In essence, the company experiences further margin declines to regain lost sales. At that point the company's leadership has lost sight of their primary purpose for being in business - to generate higher profits and returns for their investors.

An alternative to the cost cutting is offering enhancements, which carries its own set of dangers.

Product enhancements

Instead of cutting costs some companies opt to continuously improve their offerings without seeking compensation for those improvements. That way they can be perceived as being price competitive without actually reducing their prices.

There are several problems with this strategy. First, they have no way of knowing whether or not their customers value the enhancements. Unless you ask customers to pay for them you have no idea whether or not your customers value them.

Second, you've added to your cost structure without any future revenue enhancement potential. As the banks have learned, once you offer a free service it's nigh on impossible to charge for it later. Those services become a constant drain on your profits.

Third, enhancements that aren't valued by your customers do not increase customer loyalty. Indeed, I've seen some instances where companies' "enhancements" have actually driven away some of their customers because it destroyed the value their customers enjoyed.

Finally, unless the enhancement is highly innovative AND deals with some disappointment that your and your competitors' customers experience in using your offerings, you're not likely to attract your competitors' customers. Again, you'll merely have added to your cost structure without gaining additional revenues.

As you can see, the path of competitive price intelligence is fraught with often overlooked dangers. The simplest way to avoid them is to not embark upon that path. Instead focus your attention on determining what your customers desire that they'd be willing to pay a premium to get, and finding ways to satisfy those desires while being compensated well for doing so.

About Dale Furtwengler

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