4 Reasons Not To Base Your Pricing on Your Competitors

 Knowing Your Pricing Can Make All The Difference

If you ask most small business owners how they determined their prices, at least 80% would tell you they base theirs on what their competitor is charging. They might be slightly higher or lower, but they believe that if that is what the competition is charging, then that is what customers must be willing to pay.

While this makes setting price, relatively easy, it can also represent a bit of a flaw in thinking about who you are and what you have to offer. Here are four things you might never have considered in using this logic.

  • What if your competitor Is wrong? – If you have no idea how your competition came up with their price, are you sure they did their homework? Likely not. Very few businesses use best practice pricing strategies such as value-based pricing methods that set prices based on the customer’s willingness to pay. In some cases, they will go as far as to look at the price of similar types of products and try to extrapolate a price, even though the function, materials, and needs can be quite different. Without doing the homework, many businesses simply don’t know what they can charge, so be careful who you are following.
  • What if you haven’t factored in your real costs? – In a product there are most costs than simply the cost of the components and labour that goes into producing it. There are costs such as inventory shrinkage, freight, storage, overhead costs, etc. that all need to be factored in the real cost of a product. The same thing goes for services. It is more than just the labor cost that needs to be factored into setting the prices of the product or service you offer. Without doing the homework to understand the “true” cost, the price you set could make it difficult to succeed.
  • What if this is a drive to the bottom? – When you set your prices against your competitor, commonly they are set slightly lower with the hopes of being able to lure over customers. This type of thing can start a price war, where competitors start lower their prices in the hopes of capturing market share.  If competitors are continually lowering their price, that price war type strategy can be costly for everyone involved. Not only is it costly, but it can also create an expectation with customers, that your product or service should be discounted. No one wins.
  • What if you don’t know who you are competing with? Many times we think of a competitor as being the company that is doing something very similar to us, but sometimes the more important competitor is the one that is entirely different. If a customer is looking to solve eating dinner, that can be in the form of a fast food drive through, a formal sit down dinner, a buffet or even going to the grocery store. A single restaurant can’t compete with all of these, but in fact you are. You could be getting evaluated based on things far beyond price. It could be location, reliability of the food, the effort required, payment options, the type of dress required, etc.

Doing the homework required to set your pricing does take some work, but when you get it right you are able to guarantee that you are bringing the greatest value to your customers, and that is what truly keeps them coming back.

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