Deciding on a price for your products can be a tricky topic for many startups and growing businesses. Questions like “am I charging too little, too much or should I be combining offers” can drive business owners mad.
With new products or services, sometimes the only way to discover the answer to those questions is to get the product or service out there and test how customers value the proposition and what they’re willing to pay.
But what about where you’re not the only supplier and your product or service has competition? Most of us fall into this category. Of course, bench marking yourself against your rivals’ offerings is important, where you can find this information out from publicly available sources (like public websites, trade catalogues, even walking shop floors and taking notes) . But even if you decide strategically, that you could undercut your rivals and offer your competing product at a lower price, this may not prove a long term or sustainable and profitable solution. We recently blogged about pricing for success. If you missed the helpful guidance there first time around, it’s worth taking a look.
And after you’ve settled on pricing, check if there are any specific rules or conditions that may affect the way that your business is able to advertise or communicate its prices. More free information on how to make sure that your business is advertising responsibly and trading lawfully can be found here and here.
Another serious pricing-related topic for retailers that has been doing the rounds in social media, is price fixing.
As a result of a few recent incidents of price fixing, the UK’s big brother on competition rules, the Competition and Markets Authority, has launched a campaign to explain the rules and implications of price fixing to online sellers. Of course the competition rules don’t just apply to online retailers but in the build up to a busy Christmas selling period for retailers, especially those that sell online, the guidance of the CMA should not be ignored and should be adhered to.
Their at-a-glance summary of the rules explains what price fixing is and what you can and can’t do. In essence you should remember that businesses and their owners, managers and/or employees are not allowed by law to discuss the following with their competitors: prices, bids for a contract and trade secrets and other market relevant information that once divulged, this knowledge may well reduce competition between them. This would cover for example, sales and production figures, customer lists and terms of supply, terms with suppliers, future pricing strategy – anything that has not been published, remains a trade secret and that you, your board or investors, would not want to appear as a headline in tomorrow’s news for all your rivals to see.
How does competition get reduced by price-fixing and why is it such a bad thing? Well, if for example, two businesses get together and agree that they won’t undercut each other so that they can both make a decent margin on their competing products, that’s tantamount to price-fixing. They’ve essentially discussed their pricing strategy with each other (considered a confidential and non-disclosable business secret) and they’ve forged an arrangement that strips away any market dynamics or competitive incentives; instead of the two of them trying to outdo themselves to win customer loyalty by giving their customers a better deal on price, they’ve created an artificial situation where customers lose out because they’re paying more than they would otherwise have done if normal, competitive market conditions applied. Competition law exists for this very reason – to protect consumers from unfairly paying higher prices or otherwise getting a worse deal (e.g. less choice, diminished quality).
As a business owner it helps to identify where you may be vulnerable as far as anti-competitive behaviour is concerned. Consider implementing policies and guidelines for your employees and also train them on these matters, because the actions of just one employee who agrees a price-fixing deal with another employee from another rival business, is all it takes to open the door to both businesses, and their management, facing cartel penalties.
And pay attention to what your customers are telling you about your prices. Not only are they often the ones who spot first, and indignantly whistle-blow on, price-fixing cartels, they’re also a key barometer for you concerning how the value of what you’re offering is perceived. Never take customer complaints lightly.
Don’t make the common mistake of assuming you’re too small to be of interest or to trigger the legal prohibition. Size doesn’t matter with the competition law rules on price-fixing. However small or large your business, if you engage in price-fixing, you will have broken the law and exposed yourself to penalties, and even prison sentences, in worst case scenarios. Many small businesses in very diverse sectors and regions across the UK have been investigated for price-fixing recently by the CMA.
Of course, if you need any assistance with robust policies or training materials or, if you’re worried that someone might have over-stepped the legal boundaries of competition law, get in touch with us. We can help you.
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PS We have also pondered the question of pricing when we had to decide on the annual subscription cost of our online business and legal solutions hub, elXtr. There is nothing quite like it out there to compare it with. It may be a blessing in disguise but it did give us a few headaches until we settled on a yearly subscription fee of £45 for businesses. Did we get it right, well you tell us?! We sure hope so.
The CMA has produced information that includes an at-a-glance summary for online sellers that explains what constitutes ‘price-fixing’ and what they can do to avoid it. There is also a case study that provides more detail on how the 2 sellers in the CMA’s recent investigation ended up breaking competition law.