I know it might sound counterintuitive, but focusing on your competitors’ prices is the worst thing you can do to increase your revenue and margins. Stay with me, and I will show you the Double-Edged sword of pricing intelligence and how to use value-based pricing in red ocean markets.
Focus on Your Customers, Not on Your Competitors
First of all, don’t get me wrong. I am not saying that you should completely ignore the competition or the environment you’re evolving into. What I am saying is that you should not make your pricing decisions based on the wrong assumptions that will inevitably arise if you become obsessed with your competitors’ prices. Nor should you view their prices as an absolute truth or as defining the market.
Almost every time I embark on a new pricing project, the product/pricing/leadership team has spent a lot of time understanding their competitors’ pricing, which is commendable! However, they often already have a “pricing strategy” in mind, that usually consists of setting their own pricing around 10% below or above their competitors. The logic? “There are competitors out there; I need to be slightly cheaper to attract some of their customers.” Or conversely, “I have to price a bit higher to position myself as a premium option.”
The problem with this approach is the assumption that competitive pricing is the only strategy. At best, you’re initiating a pricing war detrimental to everyone. At worst, you won’t achieve the sales volume you anticipate because a mere ±10% won’t be a significant differentiator for prospective customers, who might stick with your competitor.
In other words, if you treat your business as a commodity, it will inevitably become one.
So, what’s the solution? Should you disregard your competitors entirely? Not exactly.
In essence: become obsessed with your customers, not your competitors.
A Real Story About Setting Price in a “Red Ocean”
A few months ago, I assisted a chain of sports centers looking to introduce their Yoga classes to a new city. Yoga classes are mainstream nowadays. In almost every city you travel to, you’ll find a multitude of Yoga classes. This saturation is what many refer to as a “red ocean” market, where the service becomes almost commoditized, with businesses primarily competing on price. This issue has become even more pronounced in an era where even physical services, like sports classes, can easily be compared online in terms of price.
When I was engaged to support this initiative, the team (which already had centers in other cities) was grappling with pricing for their new location. They had diligently researched the existing market players, studying their offerings and price points.
However, their initial pricing model mirrored the competition too closely:
|Challengers (our centers)||Competitor A||Competitor B|
|Monthly price for 1 day/week||100 EUR||90 EUR||95 EUR|
|Monthly price for 2 days/week||190 EUR||170 EUR||190 EUR|
When they called me, their main concerns were:
- Uncertainty about whether these prices would attract customers, even if slightly above the competition.
- These prices, though higher than competitors, posed significant margin challenges.
- Moreover, they had the impression that they “did what they could” and there were not many alternatives, rather than slightly adjusting their price tags
Quickly after starting this pricing project, it became evident that solely focusing on competitors’ prices wouldn’t suffice. This perspective was diverting them from truly understanding their potential customers’ desires and their willingness to pay. With this realization, we delved deep into crafting a more strategic pricing approach that transcended mere numbers.
Looking at the Competitors: The Good Side
Observing your competitors is undeniably valuable. Understanding market offerings and strategizing accordingly is fundamental to any solid business plan. Here are the benefits of competitor analysis:
- Market Awareness: Gaining a basic grasp of the market’s pricing landscape enables better positioning of offerings. It also validates demand and provides a rough estimation of the size of the potential customer base.
- Competitive Intelligence: Analyzing competitors’ pricing strategies can be enlightening. It can unveil tactics, target demographics, and market positions. With this knowledge, identifying market gaps becomes easier, paving the way to value-based pricing (see next paragraphs)
- Price Benchmark: While we don’t aim to mirror competitors’ prices, understanding their general pricing range provides an estimate of overall willingness to pay. Consider this a relative measure of value, akin to the “BigMac index.” It doesn’t dictate our pricing but gives a relative sense of the market value of Yoga classes in that region.
- Creeps Identification: By observing competitors, we hypothesized about unmet market needs. While Yoga is a universal practice, we aimed to discern the core motivations and preferences of our potential clients. Looking at competitors allows us to identify the creeps in their offerings
Looking at the Competitors: The Downside
While market insights are invaluable, directly emulating competitor pricing poses several risks and may lead to blindly mirroring their prices.
- Lack of Superior Insight: Competitors don’t have all the answers. In the case of our Yoga centers, their similar price points suggested an ongoing price war, but it didn’t guarantee their pricing was optimal.
- What’s True for Your Competitors Isn’t Necessarily True for You: Competitors might have hidden strategies or costs influencing their prices. Sole reliance on these external price points without understanding the underlying reasons could misguide our pricing strategy. In the case of Yoga centers, one center undervalued Yoga classes to promote their premium full-sport subscription. Conversely, a solo instructor was pricing her classes lower than the average due to reduced operating costs.
- Focusing on Price Over Value: Price is only one component of the value equation for customers. While pricing that takes into consideration the existence of alternatives (including competition) is essential, customers evaluate offerings based on more than just cost. Their willingness to pay is shaped not only by the competition but also by the perceived overall value of the service. In the case of Yoga, the majority of other sports centers we identified lacked parking spaces and classes during specific times of the day
- Overlooking Customer Perceptions: Setting prices based on competitors means you’re letting them dictate your pricing strategy. Instead, why not ask your customers what they’re willing to pay?
- Overlooking Positioning: Price isn’t the only value determinant for customers. Quality, customer service, and brand reputation significantly influence their decisions. Focusing solely on price could misalign the perceived value in the customers’ minds.
- Price Wars: Focusing on competitor’s pricing and feeling “obliged to match them” can lead to a destructive cycle of price undercutting, eroding profit margins, and jeopardizing the sustainability of everyone’s pricing strategy.
How to set your prices in a red ocean?
The ultimate focus when setting prices should be the customer. Steering your pricing strategy based on customer feedback, rather than solely on competitors, allows you to avoid price wars and align your offerings with actual market demand.
This approach transitions from competitor-driven pricing to value-based pricing. And it’s effective even in saturated markets like Yoga centers! We utilized our “Product Pricing Canvas” and approached pricing systematically:
- Customer Segmentation: Not all customers, or Yoga students for that matter, are alike. We identified very specific user personas, including: “Business women with little time,” “Mums/housewives with fixed schedules around school timings,” “University students,” “Men who felt uncomfortable practicing a sport often perceived as feminine,” and “Tourists and sporadic users.”
- Unmet Needs: Based on this segmentation, we interviewed individuals from each category, gleaning insights like:
- Businesswomen preferred shorter classes, early in the morning and during lunch breaks
- Budget-conscious but less demanding university students.
- The importance of parking spaces
- Ask Your Customers, Not Your Competitors: With these insights, we crafted several potential offerings for each segment and conducted surveys to gauge potential users’ willingness to pay. If you’re wondering how you can ask your customers how much they’d be ready to pay, and get an honest answer, have a look at my Product Pricing and Monetization Guide
- Pricing as a Differentiator: Our customer-focused offerings not only set us apart from competitors but also allowed pricing itself to serve as a differentiator. For tourists, we provided a special package without subscription and administrative fees. For time-pressed businesswomen, we introduced 30-minute classes that, while priced lower than competitors’ standard sessions, had a higher hourly rate.
What Happened Next
Our strategy’s turning point was prioritizing potential customers’ needs over competitors’ price tags. This fresh perspective unveiled numerous avenues for enhancement and differentiation. We realized that subtle tweaks could significantly elevate the customer experience and that there was no need to focus on competitors’ prices:
- We rolled out short “executive” 30-minute classes and extended “sport classes” of up to 90 minutes, in addition to the standard 60-minute sessions. Each duration catered to a distinct demographic with its unique price point.
- We introduced varied class timings, catering both to early risers and night owls.
- We provided “free parking” with all our subscriptions.
- We launched a non-binding contract system, offering flexibility for those hesitant about long-term commitments.
By aligning with customer preferences, we established a unique market identity, transcending mere price competition. This strategy not only attracted a loyal clientele but also emphasized the significance of being attuned to market needs rather than obsessing over competitors. It highlighted the importance of a pricing strategy rooted in delivering value while accommodating the unique demands and convenience of customers.
This new offering was launched just a few months ago and we don’t have yet enough data to get a full overview of the uplift generated by this approach. However, the first numbers look very promising, and both customer volumes and margins are above the original expectations by a 2-digit factor.
Our journey from competitive to customer-centric pricing was enlightening. It reinforced that when entering a new market, the primary focus should be understanding and catering to customer needs. This approach fosters a unique market identity and a sustainable, resonant pricing strategy in tune with market dynamics.
Indeed, value-based pricing is viable even in saturated markets and is applicable to both online and brick-and-mortar businesses. If it works in a saturated market such as Yoga classes, it can certainly work for your tech product, SaaS, or e-commerce.
So, stop getting obsessed with your competitors, and start getting obsessed with your customers!
My name is Salva, I am a Product executive, helping tech companies discover, shape, and sell better Products. My work and writing are mainly about subscription models, product pricing, e-commerce/marketplaces, and creating top product organizations.
My superpower is to move between ambiguity (as in creativity, innovation, opportunity, and ‘thinking out of the box’) and structure (as in ‘getting things done’ and getting real impact).
I am firmly convinced that you can help others only if you have lived the same challenges: I have been lucky enough to practice product leadership in companies of different sizes and with different product maturity. Doing product right is hard: I felt the pain myself and developed my own methods to get to efficient product teams that produce meaningful work.