We were recently approached by two companies looking to identify the prices of their competitors. Each of these companies were manufacturing firms that produced made-to-order products. One was a forging company and the other a plastic injection molding company.
Management of these firms believed that if they knew the hourly rates of their competitors they would be able to price more competitively in the marketplace. While competitive pricing has some value our pricing consultants see too many companies basing their entire pricing approach on what their competitors are charging.
We see several problems with this approach.
First, you are assuming that the competitors pricing strategies are appropriate and effective in the marketplace. Don’t bet on it. We see very few companies that can execute a consistent and effective pricing strategy that captures the value truly deserved by the supplier. Cost plus and competitive match strategies are the norm in manufacturing environments and neither match price to value delivered. The result is money left on the table or sales that go unrealized due to overpricing.
Second, although a company may employ a certain pricing approach we see most firms varying from the approach on a regular basis. For instance, take the injection molding company who may target $35 per hour but will drop its rate to $26 or $28 per hour when capacity is down. How will you know when your competitor is willing to settle for a lower price? If you, in turn, target $35 to match your competitor and your competitor drops to $26 per hour you will surely be overpriced.
And consider that firms may become more aggressive on lower prices at the end of months, quarters or years when trying to achieve sales targets. We typically see wide variations in pricing at these times making the competitor appear erratic in their pricing approach.
Instead of gauging your prices to competitors focus on the economic value that your company delivers and price according to value. There should be a fair trade between the benefits that you deliver and the price that is paid.