If you're experiencing a sluggish period in profits and would like to kickstart your business, consider implementing a new strategy: competition-oriented pricing.
According to The Balance, competition-oriented pricing centers market competition rather than customer demand. In other words, you consider your competitors' prices for the same products you also sell and price accordingly. Although this can be considered a risky move, because competitive pricing may lead to a loss in revenue, price changes also can give your business an advantage against your competitors.
But then the challenge is practically pricing products based not just off your competitors, but costs of production. Whether you're already committed to amping up your competition, or are considering implementing a new strategy, here are four quick tips to get started with competitive pricing.
1. Measure Your Costs
Before pricing your products using any type of strategy, it's important to have an understanding of the costs of the products. The first step is to properly measure the costs of your business operations.
Entrepreneur recommends first listing off your assets and expenses. If you're running a retail storefront, assets would hypothetically include a cash register, tables and shelves. Expenses include establishing an LLC, office repairs and a web domain.
You may also have success with cutting back on the costs associated with operating your business. For instance, Chron suggests lowering production costs in order to reduce product prices. Otherwise, it's difficult to slash prices on your products without losing money in the process.
2. Study Your Competition
After getting a grasp on your business costs, it's time to study and analyze those who sell similar products as you. What are your competitors charging for nearly identical products? Do these prices fluctuate over time? What kinds of discounts do they offer and when do they offer them?
Take some time and be patient with this analysis. It's great to study these prices over the course of a season — such as winter, spring, summer, or fall — but preferably a whole calendar year.
Once you have a frame of reference on your competitor's prices, you can determine your products prices. Market Track says you can implement one of three strategies: pricing your product the same, slightly below or slightly above that of your competitors.
3. Consider Selling Below Market Value
One way to catch a customer's attention is to price products below market value. However, there is an obvious risk here you should be aware of: loss of revenue. Sometimes, when prices are slashed too much, you can miss out on profiting at all. In fact, a sale can even cost you, if discounted too much.
However, Entrepreneur stresses that you need to ultimately be aware of your breakeven point, or the point at which your costs and income become equal. Your breakeven point is where there is no profit. Find this number using The Balance's formula based on fixed costs, potential prices and variable costs.
4. Offer Incentives, But Not Too Many
Discounts are a great way to boost sales in the short-term, but don't get carried away, either. Double discounts, or allowing customers to use multiple discounts on a single order, can lead to instability. For instance, an example of a double discount would be allowing a customer to use a coupon code (such as a 15 percent off discount) during a limited-time sale (such as 50 percent off everything for Black Friday).
However, limited time pricing — such as 25 percent off for 24 hours — is a effective way to experiment with new prices. Plus, Harvard Business Review says discounts can lock in new customers, creating an opportunity for recurring business. The short amount of time allows you to take a risk, but only a little. To find out how much of a discount you should offer, use a "margin with discount" calculator.
Knowing your competition is crucial to any business. When it comes to competition-oriented pricing especially, you'll need to not only be familiar with other businesses, but study their prices over time as well. Although there are some risks involved with competitive pricing, with short-term experimentation, you can determine if cheaper prices and discounts give you the upper hand over your competitors.