In this article, we explain the limitations of competitor price matching and how retailers can optimize their success with an innovative pricing approach: predictive pricing.
The benefits and limitations of competitor price matching
Price is one of the most important factors influencing purchasing decisions. Getting a good bargain is an important criterion for 87 % of consumers, according to Google’s global retail study. In order to determine an enticing price point that increases sales, many companies use competitor price matching. It’s a fairly easy method, a shortcut to extensive market research and calculations, and it yields results.
With competitor price matching, retailers look at similar or identical products from competitors and undercut their prices just slightly. The simple logic: When customers search for a product, they usually choose them rather than the more expensive item of the competition.
So yes, a competitor pricing strategy can help increase market share and attract new customers. That’s why it is still one of the most used price optimization strategies. However, it comes with costly downsides.
Limitations of competitor price matching
How it fails to consider long-term strategic goals
Competitor price matching focuses on immediate gains and is limited in long-term strategic planning. As the only tool, a competitor pricing strategy might undermine efforts to develop a more sustainable competitive advantage by focusing on innovation and brand building.
Price wars and margin erosion
Price matching can become a race to the bottom where no one wins. When competitors continuously lower their prices to undercut each other, they lose significant margins which, in the long run, harms the profitability of all players in the industry.
Lack of differentiation
There are more ways to sell than offering the lowest price. When companies focus solely on matching competitors’ prices, they neglect other levers such as brand differentiation, product innovation, and customer service, which are even more likely to attract customers who turn into true fans of the brand.
Reactive nature
Competitor price matching is easy but reactive: Instead of thinking proactively about how to improve their offer and create opportunities, retailers just respond to their competitors’ moves. In doing so, they miss the chance to foster innovation and shape the market.
Ignoring customer behavior
Price matching doesn’t take into account different customer segments, their preferences, and willingness to pay. It’s a one-size-fits-all approach that leads to missed opportunities for targeted marketing and personalized customer experiences.
The alternative: Predictive pricing
AI is a game-changer for pricing. With AI-powered pricing solutions, retailers leave behind the limitations of competitor price matching and adopt a proactive approach. Machine learning algorithms analyze a vast array of different internal and external factors that influence price elasticity, such as historic transactions, product attributes, inventory levels, season, weather conditions, promotions, and competitor data.
With complex market dynamics, AI algorithms are better than humans at identifying correlations in data and spotting opportunities for an increase in profits. According to BCG research, companies that use these price recommendations based on AI analysis, can achieve impressive results: They increase profits by 5 – 10 % while sustainably lifting revenue and improving customer value perception.
At 7Learnings, we took it a step further. Based on past data, our solution can simulate the effects of price changes on sales, profits, margins, and price elasticity. Short- and long-term. Companies can define a specific business goal, and the predictive pricing solution will steer prices toward it as fast as possible. All it takes is the click of a button.
Benefits of predictive pricing over competitor price matching
Proactive decision making
Retailers are able to anticipate market trends and customer behavior and steer their businesses with foresight into the future. Always one step ahead of the competition.
Optimized pricing strategies
Predictive pricing can optimize prices down to the product level. This tailored approach helps meet business objectives and better serve customer needs.
Enhanced profit margins
With predictive pricing, retailers can simulate the effects of discounts on sales, margins, and profit, and avoid unnecessary discounting. Instead, they can capitalize on high-demand periods.
Improved inventory management
With predictive pricing, retailers can simulate the effects of discounts on sales, margins, and profit, and avoid unnecessary discounting. Instead, they can capitalize on high-demand periods.
Increased customer satisfaction
Predictive pricing aligns prices with customers’ willingness to pay, and in doing so enhances their shopping experience. Attractive prices help to improve customer loyalty and up recurring revenue.
How to implement predictive pricing
Companies that want to profit from AI-assisted pricing don’t have to build their own AI solutions. Of course, individual software is always best to fit your processes and requirements, but the development is costly and time-consuming, and the benefits over a strong pre-built AI solution are small. Based on the experience of our customers, we are confident to say that, in most cases, retailers will see an increase in profitability in just a few weeks using 7Learnings.
Our implementation process is simple. You will be guided by our price optimization experts every step of the way. You don’t need to worry about your data quality, data aggregation and integration with your backend systems – we will check every aspect and make the best of the data you have. Don’t wait until your technical setup is perfect. In most cases, immediate improvements are possible.
Conclusion
Pricing is one of the strongest levers companies can pull to improve their profits. According to a McKinsey study, 1 % improvement in pricing leads to an increase in profits of 8 %.
Competitor price matching is a simple method of price optimization that is outdated considering the more advanced options we have today. AI-based predictive pricing now represents the new gold standard of pricing.
Companies that implement predictive pricing now will have a definite advantage over their competitors that are still hesitant to let go of their old-fashioned but familiar techniques. With 7Learnings, we regularly see uplifts in profits in the double digits and know how powerful predictive pricing can be as a diver of growth and success.
In the future, it will no longer be the company that uses AI in its pricing that comes out on top. The market will be dominated by whoever uses the best AI tools in the most intelligent way. Make sure it’s you.
