Pricing Strategy: A tough competitor enters the market with a new offering and aggressive pricing. How would you respond?

Changing your price, whether in response to a competitor or a change in strategy requires careful consideration and analysis. To get started we recommend taking some of the emotion out of the decision by looking at the cold hard numbers. Watch this short video by William Gotzmann illustrating how simple break-even analysis informed pricing options for a leading maker of cinematography equipment facing some tough competition. Some of the video images are stunning!


As the video explains, understanding your options in terms of volume, price and profitability is a key step when evaluating pricing decisions. In the video, we see how the maker of the Epic Red camera not only reduced its price but reduce it by a whopping 40%.  That takes guts, my friends. We also know that the strategic implications of making bold pricing decisions go beyond modeling sales and margins. Let’s look at a few other factors that likely played a role in the company’s pricing strategy.


Advantages are temporary. 

To your customers, the value of your solutions varies in relation to their perceived alternatives.  Your customers are willing to buy your solutions if they feel they derive enough value to justify the price.  If your competitor’s offering is not only priced lower, but also delivers similar levels of value your differentiation has eroded.  Perhaps the maker of the Epic Red camera faced this double whammy scenario, lower price from a competitor and diminished differentiation, so they had to respond by lowering their prices to adjust to their new market reality.  In fact, all companies face tough decisions on how and when to align price and value as their markets mature and their differentiation disappears.


Let’s talk value. 

If you are not interested in lowering your price or you can’t afford to lower the price then you have to increase value by rethinking your offering strategy.  This is what the company behind the Epic Red did. A short 12 months after lowering the price of the Epic Red, they introduced a new high-end brand of cameras with a $59,900 price tag.  The new line included all the latest advances and technical specs that their loyal customers expected and were willing to pay a high premium for.  The Epic Red brand became their medium tier offering which enabled it to effectively compete in a new segment of the market without alienating loyal customers. The lesson learned here is that innovation, creative offering design, and targeted competitive positioning are all key factors in creating and capturing value.     


Using price to make a statement.

A bold price response to a competitor signals your commitment to defending your market.  It also signals that you have the confidence that there is enough pent up demand for your products that a lower price point will open doors to new customers to your brand.  Despite the lower price tag, bringing on new customers to your brand creates future profit opportunities by enabling sales of complementary products and services over the lifetime of a customer.  Given the right conditions, a price drop is an opportunity to welcome new customers and create new revenue streams all while keeping competitors on their toes.  Just don’t forget to formulate a clear path for monetizing and increasing the lifetime value of your new customers. 


Know thy customer.  

Every market has a portion of loyal, value and price buyers. Loyal buyers will typically stay with you, knowing that switching suppliers may not be in their best long-term interest. Your loyal customers realize that both pricing and value are transient and they trust that you are not just resting on your laurels but working hard to stay ahead of the competition with new offerings that deliver more value.  Value buyers, however, tend to scrutinize their competitive options in more detail but as long as you continue to create and deliver value, you’ll be able to minimize the risk of losing them to lower cost solutions.  The introduction of the high-end line of cameras tells loyal and even value customers that dropping your prices was simply a tactical maneuver and that you remain committed to staying ahead of the competition by providing high-value offerings through innovation. 


The power of pricing.

Pricing is a powerful strategic weapon and getting it right is critical to the success of any business. Study after study shows that pricing is your most important growth and profit lever. With the right financial modeling tools and strong strategic thinking, your organization will be prepared to take on future pricing challenges.  


Use this interactive calculatoto model your next price change.


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