How to Find Competitors’ Prices

The formula for “value-based pricing” is simple. Your buyer’s “willingness to pay” is equal to the competitor’s price plus positive differentiation value minus negative differentiation value. In other words, whatever your competitor is charging plus how much the buyer values what you do better, minus how much the buyer values what your competitor does better. Simple formula, but not so simple to implement.

One question that often comes up when teaching this is: “What if I don’t know my competitor’s price?” Seems important, since it’s the beginning of the formula we just discussed.

There is no magic bullet, but here are several ideas to think about.

List price. You may not know how much your competitor discounts, but if you can find their list price it can be helpful. You probably want to set your list price relative to theirs (plus or minus the value difference). Then assume they are offering industry standard discounts.

GSA. If your competitor sells to the government, their prices are likely on the GSA price list. Although I’ve never used this, I’ve heard you can find some fantastic information here.

Freedome of Information Act (FOIA) requests. Often, after a government bid is over, you can get access to the bids using FOIA requests. This could be time-consuming, but it may be worth it.

Partners. If you use a sales channel or other types of subcontractors who also partner with your competitors, they likely have the information you seek. They may not share it with you, but it doesn’t hurt to ask.

Salespeople. Your salespeople will tell you what they hear in an account. Often, they will learn how much the competitor is charging. Be very careful here. Ask sales where the information came from. If the information came from a buyer’s procurement agent, they are likely telling you your competitor’s price is lower than it really is. However, if the price came from an engineer or a user that’s part of the decision process, you can probably trust it.

Build a database. Consider creating your own competitor price database. Every time you hear a price, enter it into the database. Log who gave it to you and the original source of the information. Over time, you may create a pretty clear picture of your competitor’s prices and maybe even their pricing strategy.

What other ideas or techniques do you use? Please share with us, the community.

Stop Sales Discount Authority!

Earlier this week I had the privilege of interviewing Mark Hunter (TheSalesHunter.com) for an upcoming Pragmatic Live podcast. I’ve been reading Mark’s blogs and books for a long time. He’s a sales trainer who really gets pricing.

In our interview, Mark said something I hadn’t heard him or any other sales leader say before. “Don’t give any discount authority to sales.” Wow. My jaw dropped. The concept is phenomenal, but is it real?

From a pricing person’s perspective, I always believed that I couldn’t and probably shouldn’t try to tell sales teams they had no authority to discount price. They would fight back. In fact, there are some logical reasons to give salespeople discount authority.

It speeds up the sales cycle. If the end result will be a discount to the customer, it’s a waste of time to have salespeople escalate an opportunity to the company, when you know the discount will be approved anyway. It’s even possible that slowing down the response time to the customer risks losing the deal.

One could argue salespeople have a much better understanding of any specific buyer’s willingness to pay. In that case, price decisions should be made by the people with the best information.

Yet Mark’s idea is incredible if you can implement it. Think of a salesperson as having a bag of tools to pull out to get the job done. Many of those tools communicate value to the buyer. What’s great is both the buyer and the salesperson want there to be more value. But there is this one tool, price, where the salesperson and the buyer are at odds. Yet the salesperson wants to close the deal, and there is this conflict over price. By using the price tool, the salesperson reduces some conflict and may close the deal, but did he have to?

If you price your products fairly with respect to the amount of value your customers will receive, then lowering price was simply reducing profit. What would a salesperson do if he didn’t have the price tool available to him? He would sell value. The customer would ask for a lower price and the salesperson would point out that the value far exceeds the asking price.

The point is, if you give a salesperson a tool, expect him to use it. This is not saying anything bad about salespeople. They are using whatever tools they have to close deals. However, if they don’t have the price tool, they will still close deals.

I’d love to hear from anyone who has taken discount authority away from salespeople. What happened? Did sales object vigorously? Did you track average selling price? Sales cycle?

The Value of Pricing Data from Your Distributors

You are about to read some details of a project I was part of that collected and analyzed some pricing data from one of our distributors. You may not be able to exactly replicate this, but you can likely do something similar or even much better.

Many years ago, when I was running pricing for a semiconductor company, we put on a huge effort to gather competitive pricing data for thousands of parts. It took us several weeks to define who the competitors were for any one part, and then we painstakingly went to the website of Digikey, one of our distributors, and collected all of their prices one by one . We also collected the prices Digikey charged for our parts. FYI, Digikey carries almost every semiconductor manufacturer’s parts and they sell anywhere from one unit to thousands of units. Companies who buy semiconductors but don’t need huge volumes buy through distributors like Digikey.

The original intent of this exercise was to make sure our prices were in line with our competitors at the point of the end buyer’s decision. We used our knowledge of the parts’ capabilities combined with the Digikey prices to create value maps for our product. We were thrilled at the outcome from our value maps, but we learned so much more.

We deciphered the way Digikey marks up our parts. It wasn’t a simple markup on every part. Their markup percentage depended on their volume and the price they paid. We created a tool so we could enter the price we wanted at Digikey’s website and the tool would tell us how much to charge Digikey. For each part, we looked at the value maps, determined what price point we wanted Digikey to set, and used our tool to the price to sell to Digikey.

We were also able to find suboptimal prices, because Digikey changed their markup percentage at specific price points. For example, if our price to Digikey was between $0.25 and $0.49 they used a 250% markup for a single unit. If our price to Digikey was between $0.50 and $0.99, they used a 200% markup for one piece. This means whenever we priced something at $0.49 they charged $1.72. If we raised the price one penny to $0.50 Digikey lowered their price to $1.50.  After learning this, we changed the prices we charged to Digikey for hundreds of products.

We found Digikey made mistakes. Now that we know their markup algorithm, we found outliers. After pointing these out to DigiKey, they agreed they were a mistake and brought the end customer prices in line with where they should be.

Knowing what all we did about how Digikey set prices, we then turned it back on our competitors to see what we could learn about how our competitors set prices. We charged the same price to Digikey regardless of the volume they sold. However, it became obvious through statistical analysis that our competitors lowered their price to Digikey at higher volumes.

Finally, the last thing we did was put together a web scraper on Digikey’s site to collect their prices monthly. The big win out of this was seeing when our competitors changed their prices so we could respond accordingly.

I just provided some specific details on how we used price data that we captured from one of our distributors. It proved to be extremely valuable. Unless you’re in the semiconductor industry, you probably won’t find the exact same things we did. However, if you sell through distribution, there may be a treasure chest of information waiting to be discovered. You never know what you will find, until you start looking.

Don’t Upset Your Customers – Maybe

“Hello Mark, I have a pricing topic you may or may not want to use in a blog. I recently returned from a weekend trip to Denver. I booked the flights using Travelocity, because the cheap Southwest airlines fares are were all gone. I flew United to Denver and returned on Frontier. Everything about the flights was fine (on-time, cleanliness, quality of service, etc.), with the exception of my online check-in with Frontier. They charged me $40 for a carry-on package that I was not aware of at the time I bought the ticket.

I was very mad for two reasons. I hate surprise charges and, right or wrong, I don’t feel airlines should charge for carry-on luggage. I paid my $40 plus $15 fee to reserve a window. Note that I use the $15 early check-in with Southwest all the time, so this fee is acceptable in my mind. So here is the kicker. I get to the airport with time to spare, and I pull up my email confirmation that shows the total flight for the one-way fare. And it is $125, which I say to myself, “Oh that is reasonable,” but I am still upset and will try my best to avoid Frontier when ever possible.

I am sure there is fine print somewhere that told me the baggage fees were not included. If there would have been a pop-up window asking me, I would have not been surprised, and I would have bought the ticket and been happy with the total price of the ticket. My point is that there was good value in the ticket price, and the service was fine, but I am still unhappy because of the way they priced the ticket. – Stewart”

In this case, Frontier sold Stewart a very inexpensive ticket. Stewart believed that was his total price. (Obviously he hasn’t flown no-frills airlines before.) He was surprised with an additional fee, which upset him.

Do we think Frontier is pricing well or not? Having a very low fare on Travelocity will obviously bring in business, so it seems good at first glance. Then, they have complements or add-ons they sell at good margins, which is also a good pricing move. These are things they may have learned in my pricing class, so I can’t condemn them for it.

The downside is in Stewart’s statement: “But I am still upset and will try my best to avoid Frontier whenever possible.” I’d predict that if Stewart was really upset and never again flew Frontier, and if everyone is like Stewart, then Frontier is making a huge mistake. However, knowing my friend Stewart, he will fly Frontier again if it’s cheapest. (You could tell he’s frugal by the beginning of his story.) Maybe this first time he’s upset. But if he buys from Frontier again, he will know what he’s getting into and won’t be so upset.

But let’s say Stewart was mad enough to never fly Frontier again. Is everyone like Stewart? (I hope not.) The fact that Frontier has a loyalty program says that some people are repeat customers. Frontier has made a market-segmentation decision that they will market and sell to buyers who do not banish them forever for high-priced complements.

Here’s a general business rule: Don’t upset your customers.

Profound, huh? But a more nuanced version might be: Serve market segments you will not upset.

I know many people who fly the no-frills airlines. There is nothing wrong with that. I happen to be a frequent flier on American Airlines and am unhappy when I find myself on any airline except American. Most of my colleagues also have a favorite airline. Stewart’s favorite airline is obviously Southwest. This is what segmentation is all about. Your key takeaway: Know your target market segment and serve them exceptionally well. You can’t be everything to everybody.

 

 

Who Drives Pricing in Growth Companies?

From a reader: “Mark, I love your daily LinkedIn posts. Thanks for sharing. I find pricing to be a fascinating topic. Question: In your opinion, who should and who usually drives pricing within (tech) growth companies? Most companies I’ve spoken to, it’s all over the place. I feel like it should be a product management function (with inputs from all the relevant stakeholders). What’s your experience?

You are absolutely right, it is all over the place. Here is what happens. When a company is first started, the founder/CEO is heavily involved in pricing. It’s part of the initial business plan. As the company grows, the CEO is way too busy doing other things so pricing gets moved elsewhere.

Part of the problem is that there is no obvious place to put it. Sales wants to control it. Product management may be writing business cases for new products, which should include pricing. Product marketing should be watching what’s happening in the marketplace to have their pulse on competitive offerings. Oh, and don’t forget finance. They want to control the margins.

Another part of the problem is pricing seems like a relatively small job. You put a price on it and you’re done. Pricing should not require a person dedicated to that function. Or at least that’s the thinking.

Another part of the problem is that very few people actually understand pricing. What does it mean? How many different pricing decisions have to be made inside the company? It should be easy: Figure out our costs, add a margin and you’re done. Ugh.

Where does pricing belong in startups? In my order of preference:

  1.  Whoever owns P&L. Pricing is a crucial driver of profit. Whoever is motivated to maximize profit has the right incentive to get pricing right.
  2. Product management. Owning pricing makes them seriously take price into consideration when they are defining the next products. Building products with value is the easiest way to win at higher prices.
  3. Product marketing. They should be closely monitoring who’s buying, who’s not and why. They should understand the competitive landscape (as should product management) so they can price accordingly.

That’s it. Sales should not own pricing. They have too much incentive to drop prices too much. Finance should not own pricing. They don’t understand the value of the product.

What Is Anchoring?

AnchorA colleague asked me: “Mark, what is anchoring? I wanted to get your explanation of the concept with regard to pricing and maybe an example if you have one.”

Anchoring is a strange phenomenon where the mere act of thinking about a high number biases that person toward higher numbers. Dan Ariely, professor of psychology and behavioral economics at Duke University conducted a fascinating study where he and his colleagues asked people to write the last two digits of their social security number. Then they asked them to bid on a specific product. People with higher social security numbers bid more for the products, sometimes more than twice as much. Getting people to think of a high number anchored them to higher prices even though the numbers had nothing to do with the price or the value.

How is this used in pricing? There are several examples:

Negotiations. When you you start with an extreme bid, you anchor the other person. That could bias your opponent in your direction. Of course, too extreme of a bid may cause them to discontinue negotiations immediately.

Advertising. If possible, put a number toward the top of the ad that is much bigger than the price. The number doesn’t have to have anything at all to do with price. It may be that last month you sold 1,000 units. Then, when people see your price, it looks smaller.

Presenting good, better, best. Often, when you present three solutions, you want to start with the best, the most expensive one. Then, the other ones look less expensive.

Sales conversations. Early in the conversation, say something with a big number. For example, “we killed 3 million bugs last year” or “over 10,000 companies have a problem like this.”

Although this phenomenon can be proven in experiments, in my opinion, it is not very powerful. In the right situations, it is worth trying, but focusing on creating and communicating value has more influence on buyers’ decisions.

 

Pricing Is Poker, Not Chess

In her book, “Thinking in Bets: Making Smarter Decisions When You Don’t have All the Facts,” Annie Duke started off with “Life is Poker, Not Chess.” Wow.

Have you ever read a book that gave you a way of thinking that is just common sense, but you really needed someone to make it clear for you? Annie Duke’s book did exactly that for me. I couldn’t help but apply it to the world of pricing—over and over again.

Getting to the title of this blog, chess is certain. There is no hidden information. Poker and life and pricing all have hidden information. Accepting and internalizing this fact provides new clarity into our decisions.

Consider a scenario where a salesperson has a big opportunity with a buyer. He brings the opportunity into the executive team and together they all agree on a price. The salesperson delivers the price to the client. Looking back on that decision, if they won, it was a great decision. If they lost, it was a bad decision.

Not so fast. It’s easy to label that good or bad based on the outcome, but once you add uncertainty, it’s possible to make a good decision that turns out poorly or a bad decision that turns out well. Could we all agree that deciding to drive drunk is a bad decision? But what if the drunk driver made it home safely? The outcome was good, but the decision was bad. Similarly, you study consumer reports for the most reliable car. Find the absolute best and buy it. But your car was a lemon. You have lots of problems. The decision was probably good, but the outcome was bad.

Back to our scenario. The price they chose may win 8 out of 10 times. But this time it didn’t. Maybe the decision was good, but not the outcome. In the world of pricing, there are so many things we don’t know for almost every deal. I brainstormed a quick list:

  • What don’t we know?
  • Is procurement lying?
  • Who is the competition? No competition?
  • What is the competitor’s price?
  • What does the buyer think of the competitor’s product? Our product?
  • How much does the buyer value the differentiation?
  • Who really makes the decision?
  • How will the decision be made?
  • What will our cost to deliver/implement be?
  • What are the buyer’s expectations?
  • Will the customer be satisfied?
  • What is the buyer’s willingness to pay?
  • What pricing model best fits this buyer?

Just because you win or lose a deal doesn’t mean you knew everything. If you didn’t know everything, at least part of the outcome was luck. The question becomes: How much is luck and how much is skill?

As a poker player, Annie studied this intensely. She had mentors to help her look at each hand and decide if she made good decisions, regardless of the outcome.

As business people, we need to learn to think like poker players. We won’t win them all, but we want our decision-making to get better and better.

This blog touched on only the first chapter of her book. It was impactful to me. The rest of the book described several ways we deceive ourselves and then she gives many ideas on how to learn to make better decisions in a world of uncertainty. I highly recommend it.

Tariffs and Pricing

Question from a reader: Hi Mark, I have been following you on LinkedIn for several months and I really admire your posts and articles. I am wondering if you have given any consideration into writing an article about tariffs from a pricing perspective? There appears to be a real lack of literature available. Please keep the posts coming!

And a follow-up question: Hi Mark, if I could add, one of the debates that we are having internally is how transparent we should be in our pricing. For example, do we bury it into our overall fee or do we consider expressing it as a separate line item such as a parcel courier might do with a fuel surcharge?

Fascinating questions. Like you, I haven’t seen any literature on this topic, but let’s apply fundamentals. First, what should you do with respect to tariffs? I’m guessing you’re really asking, should you raise your price? The answer will fall on the decisions your buyers are making.

First, if it’s a “will I?” product, then there is no reason you couldn’t raise your prices. It may damage sales a little, but not by much.

If it’s a “which one?” product, then you have to look at what your competitors are doing. Are they being hit with a tariff too or not? If they are, then you can likely raise your price and your competitor will follow. The big problem occurs when you face a tariff and your competitor doesn’t. This will not be easy.

Let’s say before the tariffs, you charged $100 and your competitor charged $90. Your product is better, though, so about half the market bought from you and the other half from your competitor. Suddenly, due to a tariff, your costs went up 10% but your competitors costs didn’t change. You have three basic choices:

  1. Don’t raise your price and accept smaller margins. Buyers in the market will not see any change in competitive dynamics.
  2. Raise prices. Maybe your competitor will raise prices anyway, just to make more margin. If your competitor does not raise prices, then you will likely lose market share. Some people will think your product is not worth that much more than your competitors and will switch. However, some people probably do value your differentiation more than you raised your price. You will be serving the segment who value you the most. You will want to estimate how many people will still buy from you.
  3. Get out of the business. If you can’t be profitable by holding price and you will lose your market by raising price, this may not be the business for you.

The second part of your question, about being transparent, implies you are already thinking about option two above. The answer again will come from the mind of your buyers.

As a general rule, you want to blame price increases on cost increases. A new tariff is definitely a new cost increase. You should mention the tariff. But should you have it as a separate line item on the invoice?

If you are 100-percent certain you will remove the price increase if the tariffs get removed, then it probably makes sense for it to have its own line item. On the line item, label it as hopefully temporary. This signals your intent and will make your buyers less upset.

However, you could think about this price increase as testing a new price point while having a built-in excuse. If you want the option of holding prices high if the tariffs are removed, then don’t make it a separate line item. What do you think of companies who put in a fuel surcharge line item when gas prices were really high, but when gas prices came back down they didn’t remove the line item? They look sleazy.

One additional point: These political times are very polarized. Anything you write or say about the tariffs could be taken as a political stance. That could alienate half of your market. Be careful and test your intentions with those on both sides of the political spectrum.

Please let us know what you do and how it worked out.

 

 

Pseudo-Socialist Pricing

Here is a fantastic and funny pricing situation from a friend.

Hi Mark,

I recently got my curb number repainted by an outfit that allows you to name your price. I thought you’d get a kick out of their complicated pseudo-socialist price list. FYI, I ended up ignoring all this and writing a check for $30.

You may want to read their flyer, but you definitely want to read their yellow price list. I’ve never seen one like it.

OK, their heart and intention is in the right place. They are trying to offer a lower price to the less fortunate and offering an opportunity for rich people to help out. They are attempting to do price segmentation. However, this could use some work.

One piece of data, every house in the neighborhood where my friend lives is worth multiple millions of dollars. (Of course, it’s in California.) It’s unlikely anybody living there is “economically disadvantaged.” Still, let’s pretend there are some. We could still do a better job.

I see three big problems with this price list.

  1. There are too many choices. A much better alternative would have been three choices: good, better, best.
  2. The cash or check column seems unreasonable. I especially like that you have to pay $10 more to write a check at the higher prices and only $5 more for a check at the lower prices. I’m guessing they prefer cash for convenience or for tax purposes. A simpler and cleaner method would be to say, “We find it challenging to make it to the bank during working hours. We greatly appreciate cash and offer a $5 discount for cash payments.”
  3. The entire thing looks unfair. I show a cartoon in class where there is a store counter and a sign that says “Rich people, $10. Everyone else, $5.” That’s exactly what they are doing here. Nobody wants to pay more because they are rich.

If I were creating this price sheet, I would make it say something like this.

Curb painting $50. If you are unemployed, please take a $20 discount.

If you would like to see your entire neighborhood with clean curb numbers, please donate an additional $25 (or something else). We will paint as many curbs as we can afford.

There is no way to know if my method would work better, but it sure seems simpler and fairer. And … I’ll bet my friend would have paid the $50.

Price Data, the Internet Arms Race and You

A reader sent in the following:

Hey Mark, hope all is well with you these days. Saw this article about Web price scrapers and how companies are using them to optimize their pricing (possibly instantaneously). I thought you’d be interested: https://www.wired.com/story/scraper-bots-and-the-secret-internet-arms-race/

Yes, I’m interested. Fascinating article, but here is the gist.

Some companies use bots to surf competitor websites and automatically collect their prices. This makes a ton of sense. If you want to price competitively, you need to know where your competition is pricing. If you collect this data often, you can detect when your competition changes their prices. If you want to have the lowest price on other websites like PriceGrabber, then you need to know how much competitors charge.

Some retailers don’t want their competitors knowing their prices, so they use technology to make it very difficult to do web scraping. Then companies figure out how to get around it. Then companies get better at blocking bots. This data war will go on, maybe forever. Absolutely fascinating.

Unless you’re a high-volume retailer, this probably isn’t directly applicable to you, but there are some great lessons we can take away.

  • First, you should put together a program to systematically and periodically collect your competitors’ prices. This is not always easy, but understanding your competitors’ pricing is crucial to understanding your buyers’ purchase decisions.
  • Second, your competitors change prices once in a while. You get to respond, but you can only respond if you know that it happened. Watch for price changes.
  • Third, web scraping is awesome. Unless you’re in the highly data competitive space of retail, odds are very good that you will be able to use a bot to scrape your competitors’ prices. Look into this. Several years ago, my company (a B2B company) used a bot to scrape prices from a distributor that put prices on their website. This resulted in fabulous information for intelligent pricing decisions.

You probably won’t get into an Internet arms race with your competitors, trying to scrape or hide your prices, but this article reminds us of the power of knowing our competitors’ prices, and that we can likely find them relatively easily. Put together your competitor pricing data collection program.