Chapter 3

Analyzing Your Competitors’ Prices

In-a-Rush Tip

Do not skip this critical chapter or the worksheet for it. But if you are in a rush, you can narrow your focus to your three or four primary competitors and your primary products.

Warning: By limiting yourself to fewer competitors, you will miss out on uncovering some add-on opportunities for extra profits for your product/service.

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Before you ever launch your new product, consumers have expectations about what your price should be. Those expectations come from what your competitors charge for their products. You need to know those expectations.

You Do So Have Competitors!

I’m always surprised at the number of entrepreneurs who believe their product is so different they don’t have competitors. Every product sold today has competitors.

Proof that everyone has competitors:

The marketers who launched the Segway motorized scooter a few years back probably had more reason than most to believe they didn’t have competitors. But they did. Their competitors are anything anyone buys that will make going short distances easier and faster.

Segway competitors listed in order of price consumers pay:

• Skateboard
• Rollerblades
• Bike
• Motorbike
• Motorcycle
• Golf cart for in-town use
• Car

How to “Pick” Your Competitors

Sometimes you can get customers to accept a higher price for your product by “picking” your competitors.

For example, business newsletters had a pricing problem. To be profitable, they need to price themselves somewhere between $300 and $1,500. But their customers are used to paying $39–$75 for Fortune, Forbes, or Business Week. Even the daily Wall Street Journal can be had (in print!) for $155/year. So business newsletter marketers learned to compare a business newsletter to a different category—consulting expenses (e.g., “You can spend just $475/year on XYZ newsletter and stay on top of hazardous waste regulations—or you can spend $15,000/year for a consultant!”).

So they’ve painted their competitive landscape (in order of price) as shown in Exhibit 3.1.

EXHIBIT 3.1 CHOOSING YOUR COMPETITORS

In this situation, newsletter publishers can either compare their products to the Wall Street Journal—and look overpriced—or compare their products to consultants and look like a great bargain!

Direct vs. Indirect Competitors

Direct competitors are those products consumers are most likely to substitute for your product as an alternative. Consider them “equivalent” products.

Your direct competitors are also likely to be where consumers get their ideas as to what a “fair” price would be for your product. See Exhibit 3.2.

EXHIBIT 3.2 DIRECT COMPETITORS

It gets a little more complicated if you don’t have a competitor as close as in Exhibit 3.2. Then your “direct” competitors may be a little broader group, such as shown in Exhibit 3.3.

EXHIBIT 3.3 LESS DIRECT COMPETITORS

Indirect competitors are less directly competitive with you. They are items consumers could substitute for your product, but that they probably would not. For example, if you sell hiking boots, consumers could buy dress shoes instead—but they probably would not. But dress shoes will protect your feet, just like hiking boots will.

If you are about to launch a product as unique as Segway was, then you really don’t have direct competitors. You have only indirect competitors. Exhibit 3.4 offers a few examples.

EXHIBIT 3.4 INDIRECT COMPETITORS

For example, look at the problems Segway faced. They got great publicity by having news media people try out a Segway. They showed up on the news, on morning shows, in magazines; they got millions (maybe billions!) of dollars of free advertising. But consumers, for the most part, didn’t buy. Instead, Segways today are purchased mainly by security personnel at shopping centers and universities, and police in congested big cities.

Warning

It is not a good thing if you have no direct competitors—only indirect. It will probably force you to do “missionary” marketing, which is the most difficult marketing of all.

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If people aren’t already buying a product that would be a direct competitor, then you have to convince people they need a product they have never thought they needed. For example, when Apple launched the iPod, they didn’t have to do missionary marketing. People were already used to buying things (portable radios and tape decks) that would let them take their music with them. The iPod just made it easier.

How Consumers Evaluate Prices

While many consumers do know the going price of staple products (bread, milk, and a few other items they buy frequently), most consumers have no idea what your price is or was.

Research by de Chernatony and Knox (1992) found just 15 percent of shoppers remembered the price of Evian bottled water and 6 percent the price of Del Monte fruit juice. Just 59 percent were able to give the price within a plus or minus 15 percent range. They conclude that consumer behavior is based on relative price assessments, not on absolute numbers.

A “reference price” is a price in the mind of consumers as to what they would expect to pay for your kind of product.

• In a few staple product cases, it’s an actual price.
• More often it’s a general range (e.g., “low $30” or “$400 something”).
• Frequently consumers have no particular price number in mind when they start considering a purchase; they develop their reference price when they start looking at the competitor options. This is almost always true with products or services consumers buy infrequently.

Exception

In a business-to-business market, buyers can simply look up your last price—and are buying in a quantity to merit that expenditure of their time.

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So, let’s picture the scenario. A consumer decides he or she might want to purchase your kind of product or service. The consumer starts looking at the choices available and finds:

• Choice A, a high-quality brand, for $28
• Choice B, a recognized brand, for $25
• Choice C, an unknown brand, for $24
• Choice D, a recognized brand, for $22
• Choice E, an unknown brand, for $21

What does the consumer now perceive/believe based on this “research” (which could just be looking at choices on a grocery shelf)? He or she now believes:

• The price for this product or service should be in the $20s. (This becomes the reference price.)
• The consumer can treat him- or herself to the best quality for just $3–$4 extra ( if the consumer decides it’s worth it).
• Choice E is a poor-quality product (even though it might be acceptable).
• Choice C becomes invisible (unless it has some differentiation that is appealing to the consumer).

Additional pricing knowledge you can gain from this scenario: If you want to charge more than $28, you’d better have a compelling, easy-to-grasp advantage—that matters to consumers—over your competitors.

While a new product can enter the market outside the price range of competitive products, it must be positioned in such a way as to explain the reasoning to customers. Specifically, it must address quality fears if it is below the range and it must stress additional benefits if it is above the range (Nagle and Holden, 2002).

How to Get Profitable Ideas from Your Competitors

To take this first critical step in setting your prices, go to Chapter 3’s Competitor Pricing Worksheet in the Appendix. Look at the tabs at the bottom to find the type of business closest to yours. Your choices are:

• Service Business
• Product Business
• Sponsor Opportunities

What do you get out of filling in the details for more than your closest two or three competitors? Maybe opportunities to add a lot more profits to your bottom line!

Notice that under “service” or “offering,” there are more lines for “add-ons.” The more competitors you investigate, the more add-ons you will uncover. Some of them may not be right for you, but others may be worth thousands (or millions!) of dollars to you over time.

If your competitors have had a price war and are keeping the basic cost of their product/service at a really low price, you may find they make all or almost all their profits from the add-ons.

You’ll need it later in the book to determine to your best—most profitable—price(s).

Your Assignment

Fill out the Competitor Pricing Worksheet today!

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