I recently consulted with a company on a social media project. I always start by going right to the business goals, we tie our social media efforts to those. What their main mission was, was to move more product. Pretty common goal really. They were currently trying to gain entry into a somewhat crowded market so they needed a breakthrough point. They decided to offer one of their mid priced products at a discounted rate and undercut their competitors by a few bucks.
When I asked how they came up with their pricing, I got the usual answer. “We looked at what our competitor was charging, and made ours 5% cheaper.”
If only this was a good idea.
Competitor pricing is a guide, not must. When we calculated the cost of buying the product, shipping it, storing it, handling it, processing it, and finally selling it, we found that we were only at a break even point. Once you factored in company overhead, wages, and all other costs, they were losing about $7 on each transaction. Now i’m no math wiz but i’m pretty sure that losing $7 per is a really good way go broke. Increasing sales of a product you’re losing money on in the first place is bad.
So we calculated the Customer Lifetime Value (CLV) of their customers and found that they weren’t recouping the initial loss. (More on this in another blog to come.)
So we reassessed the price and ended up being almost 10% higher than the competition. Not great you say? Well, the competitor was out of business four months later and we weren’t. It seems they had undercut the previous competitor to gain market share and never adjusted afterward. They never took the time to figure out if the prices they based on were profitable in the first place. This is the domino effect of price undercutting. You need to know that what you’re doing is profitable.
Be careful using competitor’s pricing structures. They may not know how to establish profitable pricing.
Without digging deeper and getting to the real numbers, they could have been the ones out of business. It’s important to know what your competitors are doing, but it’s more important to know how your business is doing. Knowing your numbers can be the canary in the coal mine. Do you know yours?
I talked about this before in regard to a different client. Just thought the common threads were there.
