In pricing discussions, a topic that often surfaces is one that centers on using competitive price data. In service parts, this subject is especially prevalent because of the available interchanges that enable you to compare a competitor’s part to one sold by your company. The concept seems simple enough: By knowing what the competition charges for a comparable part, you can better price your product. However, while the concept has merits, it’s far from the pricing panacea you might imagine, largely because a number of assumptions must be made to simplify an otherwise very complex comparison process.
To better understand the complexity of competitive price comparisons, consider the following points:
- With the introduction of the Internet and software technology, competitive price research has become more feasible, but the quality of the research greatly varies. Relying on a web-scraping service that pulls retail prices does little to help you understand what price you should be setting at a WD (warehouse distributor), jobber or installer level. By contrast, your company’s own field sales personnel – and even your customers – can provide you with timely, relevant price comparisons, but you need a systematic way to capture and code the data for analysis.
- Some third-party research companies use methodologies that are more sophisticated than web-scraping and help to determine WD, jobber and installer prices. However, even these methodologies are fraught with complexities and assumptions:
- In which region should the research take place? You can assume that the standard national aftermarket store – such as Pep Boys, Advance Auto Parts, etc. – price the same part very differently based on the number and types of competitor stores in the same geographic region. In fact, the same part might have a different price in a store only twenty miles away! As a result, the price derived from your research could easily overestimate or underestimate the price for any given brand, unless it provides a sample size – greater than 30 – of specific regional prices for EACH part-competitor combination you’re researching, and then statistically analyzes these.
- Loose vs. Tight Competition: Even if your research is accurate, the actual price variance bands among many competitors can range from very, very wide to extremely narrow. Two-thirds of the time, these price bands are far too wide to provide any meaningful information. For example, among the range of five competitive prices for the same part your company sells, should you price to the average? To the upper quartile? To the lower quartile? Min? Max? PROS pricing science can determine whether you’re working with a “wide price band” and then recommend pricing guidance to prescriptively determine where you should price your part. (For a more detailed description of the study that discusses this concept in depth, read the white paper on Market-Based Pricing.)
- Filling the gaps: Numerous research firms try to save money by “extrapolating” the parts they research to other, similar parts. For instance, rather than research all of your company’s brake rotors, they will evaluate the highest-volume rotor, and then use this competitive information as a proxy for all the remaining rotors they didn’t evaluate. This completely ignores the fact that some parts within the same part family don’t necessarily share the exact same competition. In fact, it actually causes your company to lose huge opportunities by finding the parts with weak competition that SHOULD be priced very differently from the rest of the part family. Again, advanced tools in the pricing science toolkit are more appropriately applied in this case, rather than relying upon extrapolation assumptions that can lead to false results.
- Once you’ve determined what type of research to use – web-scraping, a third-party research firm, or your own personnel performing spot-checks – you’ll still need a way to code the data for analysis. For example, you’ll want to know if the competitive price represents a part that is exactly the same fit and finish as yours, or if the competitor part features a slightly different finish or quality than your own. You’ll also want to be aware of parts that are not the same fit, but may be viewed as a “relative price check” when a customer is scrutinizing your price. Used in conjunction with the information above – knowing when NOT to use the competitive price, such as loose competition or extrapolating assumptions – you can begin to analyze meaningful competitive price comparisons.
- Finally, the use of competitive data for pricing parts came to fruition more than 10 years ago, at a period of time when technology was limited and pricing science was not yet being used in B2B service parts pricing. Be leery of pricing experts who advocate this approach as the ideal methodology because they clearly haven’t changed with the times and certainly ignore the pitfalls described here. Today, more advanced pricing science – used successfully in other industries – is being applied by leaders in service parts pricing.
The bottom line is that competitive price comparison is still a useful tool when applied correctly, but there are many situations where it is surpassed by other, more advanced pricing science methodologies. By using pricing science on your own transactional data, you can eliminate the geographic assumptions and the extrapolation risk, and understand where your part should be priced, even in cases of loose or no competition.
So, while competitive research provides some value, it would be erroneous for any company to blindly rely on the results to set their prices. Nonetheless, some firms do so because “when all you have is a hammer, everything looks like a nail.”
To get more pricing tools in your arsenal, I encourage you to download the white paper on Willingness-to-Pay in Service Parts and/or contact your PROS representative.