Sarah Jacobson 
Pricing strategy can make or break a business. With consumers able to instantly compare prices across retailers, companies need to walk a fine line between pricing competitively while still maintaining healthy margins. This requires a data-driven approach to regularly monitor competitor pricing, analyze market trends, and optimize prices accordingly.
The Basics of Competitive Pricing
Competitive or competition-based pricing is when a company sets prices based on what major competitors are charging for similar products. The goal is to perform competitor price tracking and keep prices in line with the rest of the market so as not to lose customers. Companies need to determine the lowest viable price that aligns with profit goals.
A basic competitive pricing formula factors in:
- Competitor prices
- Desired profit margins
- Overhead, supply chain, and other internal costs
- Value perception and willingness to pay
Getting the price right depends on an in-depth analysis of all these elements on an SKU-by-SKU basis and as they fluctuate in the market.
The Need for Pricing Transparency
In determining pricing, retailers need full transparency into competitive data and their own cost structures. Factors like competitor product details, delivery times, service offers, promotions, and more impact pricing decisions. Having clear visibility empowers data-driven decisions rather than guesswork.
Advanced analytics and machine learning algorithms can detect micro-market trends and model elasticity curves to recommend optimal prices. However, clean, current data is imperative for these tools to work properly. Just a 10% data error rate can lead to 1,000 bad calls for 10,000 products. Maintaining pricing accuracy is an ongoing effort.
Key Tenets of Competitive Pricing
Successful competitive pricing rests on four main tenets:
- Pricing based on sound data – Good pricing decisions require clean, structured data on competitor prices, your prices and margins, demand signals, market trends and more. Data management and governance becomes critical.
- Mitigating the human factor – Embedding analytics and rules-based automation reduces manual errors and reactionary decisions. Strategic guidance coupled with execution reliability drives optimal, nuanced pricing.
- Flexible inputs and models – Pricing logic should allow the incorporation of any market variable (competitor data, sales velocities, promos, channel trends etc.) to respond quickly to changes.
- Focus on true competitors – Not all players impact sales equally. Smart algorithms can identify who truly matters and avoid diluting margins by following irrelevant players. Historical sales data reveals cross-price elasticities.
Essentially, sound competitive pricing is market-based and data-driven, with rules to automate routine decisions and the flexibility to tweak levers. Next, we’ll explore common challenges.
Addressing pricing challenges
While the promise of competitive pricing is compelling, it comes with inherent challenges, such as:
- Data collection – Gathering reliable, structured data requires proper scraping and normalization tools. Site changes can impact scrapers. Marketplace data needs API access.
- Analysis complexity – Modeling demand curves, setting guardrails, establishing price waterfalls involves multivariate regression analysis and advanced math.
- Rules maintenance – Keeping pricing rules current amid shifting market dynamics and new data inputs is an ongoing chore.
- Resource overhead – IT, data science and analytics talent don’t come cheap. The best teams understand both tech and business.
These problems can deter companies from pursuing analytics-based dynamic pricing or quickly erode results from early efforts. But the good news is that purpose-built solutions are emerging to make robust competitive pricing easier to realize.
Turnkey Software Solutions
Retailers now have access to specialized pricing software that handles the entire lifecycle – data collection, competitor monitoring, analytics, optimization, rule configuration and execution. These turnkey SaaS platforms lower barriers to entry by packaging the technical complexities and providing the following benefits:
Data management
- Web scraping for market pricing data
- API connections to sales channels
- Data ingestion, validation and enrichment
- Cloud data lake for storage and processing
Analytics engine
- Statistical modeling for demand curves, elasticities, cannibalization etc.
- What-if simulation to model scenarios
- Prescriptive price recommendations
Rules automation
- Customizable business rules
- Waterfall workflows
- Rules library covering common scenarios
- Execution reliability at scale
Control and transparency
- Intuitive dashboards for insights
- User-friendly workflow configuration
- Change tracking for audibility
- Alerts and approvals
Ongoing success management
- Technical support
- Strategic services
- Performance benchmarking
- Roadmap input
In essence, they empower retailers to “outsource” the heavy lifting of competitive pricing to experts. This allows merchandising, pricing and analytics teams to focus their time on high-value activities like pricing strategy, exception management and continuous improvement versus manual number crunching.
The Difference Between Competition-Based and Market-Based Pricing
Competition-based pricing primarily looks at competitor prices and positions company prices directly against them. The analysis is more simple and reactive. Market-based pricing incorporates a wider range of market variables like demand trends, channel dynamics, events, and applies more sophisticated analytics to model elasticity and willingness-to-pay. It takes a future-looking, strategic view.
Competition-based pricing tends to be more tactical and focused on maintaining margin parity versus market share gains. Market-based pricing balances both margin and volume based on statistical demand models and is comfortable with varying margins for growth.
Competition-based pricing is typically done manually using simple rules of thumb. Market-based pricing employs automation, machine learning and optimization mathematics to respond dynamically to market changes.
Put simply, competitive pricing is a subset of the broader market-based approach. Leading pricing teams utilize both in tandem – relying on streamlined competitor monitoring to inform strategic decisions on pricing and promotions. Modern analytics solutions allow retailers to graduate from reactive tactics to data-driven pricing strategies.
Key Takeaways
- Competitive pricing is essential but is growing in complexity with omnichannel retail
- Getting it right requires continuous data collection, analytics and optimization
- Purpose-built software solutions ease the burden via automation and analytics
- Market-based pricing powered by AI/ML takes a more future-looking strategic view
- Leading retailers combine competitive intelligence with holistic pricing strategies
The technology now exists to turn pricing from guesswork to science. Savvy retailers are tapping experts and leveraging the latest solutions to drive growth through strategic competitive pricing.
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