As we have seen, an offerer has five competitive positions relative to its competitors: leader, challenger, follower, nicher or niche occupant, and outsider.
Regarding their pricing policy, the leader usually charges higher prices than its competitors. Coca-Cola is an example of this policy. Even so, there are exceptions. Market leaders sometimes have lower prices due to their cost leadership. Despite being a sales leader, Wal-Mart often has better prices than the competition.
The challenger (Pepsico or any other, for instance) charges identical or lower prices than the leader. When it uses similar prices, it relies on other comparative advantages, such as its quality, logistics, sales force, or sales point; when it offers lower prices, it tries to persuade buyers to opt for the same benefits as the competition but at a lower cost.
The follower, in its place, as it is considered second-line, must charge lower prices than the leader, the challengers, or any competitor that serves as a reference. Its prices vary depending on the market, the weight of the target competitor, and the image of its product and brand in the mind of the costumer. However, under normal market conditions, a few percentage points reduction in the sales price may be enough to attract many buyers to its offer.
The nicher, in contrast, because of its specialization, has a lot of pricing freedom. It can set prices that give it a comfortable profit margin without worrying about competitors’ threats in the short term. Yet if they are high, in the long run the danger exists because where there are substantial gains, competitors will emerge willing to grab them.
Lastly, the outsider needs to choose between pricing higher, lower, or equal to its competitors. Its decision will depend on its privileges, the competitive advantages of its offer, its ability to convince its customers, and the market conditions.
According to its benefits, a disruptive offer can attract buyers with a price higher than twenty percent for an experience that, if favorable, will generate a repeat order. But also, there are situations where only a substantially lower price will make the buyer bet on an option that differs from the established pattern.
C. L. Eckhard, author of Pricing in Agribusiness: setting and managing prices for better sales margins.
Claudio Luiz Eckhard is a former professor, business consultant, and author of the books “Ajustando o Rumo”[Adjusting the Business Course], “Gestão pela Margem”[Management by Margin], “A Empresa Saudável”[The Healthy Company], and “Pricing no Agribusiness”[Pricing in Agribusiness].
