Many vendors often wonder how to handle their pricing. Private vendors and artisans, especially those who operate exclusively through online distributors, have an especially hard time knowing how much to charge for their goods and services. All the while, the market for a given product or service grows more and more competitive and complicated by the day. Luckily, understanding one of these things will help you understand the other much better.
E-commerce has experienced a truly meteoric rise to prominence over the past two decades alone. For consumers, this means that they are no longer bound to the vendors in their local area. Anyone can have anything shipped to them through the mail at any time. This only serves to increase the need for every vendor looking to turn a profit to need an understanding of their unique competitive advantage and competitive advantage pricing.
What Is Competitive Advantage?
In a word, your competitive advantage is the thing that makes your business special. It is the thing you can give to your customers that no one else has. It is the advantage you have over your competition.
Competitive advantage could be anything from notoriously good customer service to a unique product to more customization options on a given order to faster shipping than most or all competitors. Customers are constantly searching for reasons why they should choose your business over the multitude of similar products, so it is always best to understand what makes you and your business stand out.
What Is Competitive Advantage Pricing?
Times are tough, people are unlikely to pay more for anything if they do not see a distinct benefit in it. It is so important to understand the competitive advantage you and your business have over others so that you can understand how to market and price your wares and compete.
E-commerce suffers from a particular need for effective competitive pricing strategies. Before the internet, most people were limited to the stores in their local area. If only one person sold a product, they got to set the price for that product in that area. Thanks to the world wide web, that is no longer the case.
Competitive pricing is part of every business, but e-commerce has increased the amount of competition behind it both among e-commerce vendors and brick and mortar stores trying to keep up with them.
How Your Pricing Strategy Can Be Used As A Competitive Advantage
Knowing both of these terms, it is likely becoming clear how an effective pricing strategy can benefit your business’s competitive advantage. A competitive pricing strategy alone could be your business’s competitive advantage as well. Some even find that competitive pricing directly helped them grow and diversify their business in a short time.
Underselling a product that you and a competitor both sell is a simple example of a pricing strategy being used as a competitive advantage. Your sales will be better on that product, and it may call customers’ attention to other products that your competitor does not have and that you can safely sell at a higher premium. Perhaps not the most imaginative example of this principle, but it does get the point across.
On the other hand, understanding the dynamics of both your pricing strategy and the strategy of your competitors can help you make more informed decisions about pricing in general. Recognizing the advantages and disadvantages of competition-based pricing can be a life-saver. Knowing how to price products so that you maximize your profit margin while also keeping the cost low enough that customers do not find it restrictively expensive is a very valuable skill.
Benefits Of Using A Competitive Pricing Strategy
Any vendor should remember that a pricing strategy should never be static. Pricing any services or goods should always be a dynamic process of assessing what your competitors are doing and the demand for certain products. It is not as easy as simply underselling the competition. That said, there are several benefits to learning exactly how competitive pricing advantages work.
The first thing that competitive pricing strategies can help you with is making you think not only about your direct competitors but also indirect competitors too. Direct competitors are easy to spot: One shoe store competes with another shoe store, one hamburger restaurant competes with another. We all know this. What is harder to see is the indirect biases.
But a hamburger shack still competes with its local Mcdonald’s, A shoe store still has to contend with Walmart. Both of these colossal companies have the money and resources to undersell you and out-produce you. The way you beat them is not by doing the same, it is by showing customers why your shoes or your hamburgers are worth spending the extra money on.
This is the central principle of competitive pricing. It is not purely about the dollar amount of your price, but how both you and your customers can justify that price. People will pay hundreds of dollars for a pair of running shoes if they think it is worth their money. The people selling these high-end shoes to them have succeeded in convincing the world of their value.
Let’s face it, these high-end shoes do not cost hundreds to make, but they are made and marketed in such a way that customers would rather buy them than a $20 pair from a cheaper store. This is competitive pricing. The manufacturers and distributors of these products recognize their competitive advantage pricing for profitability and activity-based pricing for competitive advantage.
Understanding Your Competitors to Determine Your Price
The first step in recognizing your competitive advantage is recognizing the advantage of your competitors, both direct and indirect. Sun Tuz famously said “if you know the enemy and know yourself, you need not fear the result of one hundred battles. If you know yourself, but not the enemy, for every victory gained you will also suffer a defeat.”
One way to take these wise words is that understanding your competitors helps you in a very direct way. By definition, you cannot have the same competitive advantage as your competitor. Understand what your competitors do well, and do something better than they can to exploit a weakness in their business model. This is the advantage of competition-based pricing.
About the Author, James Webster
James Webster, founder and CEO of ROK Financial has almost two decades of experience within the financial services industry. His passion for helping small business owners and his innovative way of thinking, has allowed him to run multiple successful businesses including National Business Capital & Services. Under the National name, the team was able to help secure over $1 Billion in financing for small businesses nationwide.