Predictable Competitors

Predictable Competitors, by Mark Chussil

I presume you would like to predict your competitors’ moves better than you do now. Say, for instance, their prices. Let’s work on that, perhaps with a surprise, a jolt, or even a shock as we go along.

We structure today’s harangue around a pricing quiz involving simple math. It’s not a math test, and your enjoyment (or not) of this essay doesn’t depend on whether you enjoy math.

Question 1. Your competitor charges $900 for their product. In month 1, they raise their price by 10%. In month 2, they hold their price steady. In month 3, they cut their price by 10%. In month 4, they raise 10%; month 5, hold; month 6, cut 10%; and so on. What is their price at the end of month 30?

Many people say that the competitor’s price will be $900 at the end of month 30. They figure the 10% increases cancel out the 10% decreases. That’s wrong, as we can see at the end of the first three months. Month 1: $900 + 10% = $990. Month 2: $990 + 0% = $990. Month 3: $990 – 10% = $891. It didn’t cancel out.

Answer to question 1. The competitor’s price at the end of month 30 is $814.

Question 2. What will be the competitor’s price at the end of month 31?

We’ll get to the answer in a moment.

The nice thing about patterns is that we can describe them in numbers. The competitor’s price changes +10%, 0%, -10%, +10%, 0%, -10%. We feel validated because history fits the pattern so well. We feel confident because the statistical “explanatory power” is so high; it’s perfect, in this case. We feel we can predict what happens next, as we do with the great ebb and flow of the tides, the majestic rising and setting of the sun, and the news-cycle persistence of a juicy scandal affecting not me.

We shouldn’t feel validated or confident. At least not yet. And we may not yet be ready to predict the competitor’s price.

Answer to question 2. We can say that the competitor’s price will be 10% higher than $814, or $895. That’s what the pattern says, to n decimal places, where n is a number larger than we require. But what’s much more interesting, if we put down our calculators and put on our thinking caps, is to ask and answer question 3.

Question 3. Why has the competitor’s price been rising, holding, falling?

(Did you ask question 3 before you answered question 2? Give yourself a round of applause if you did. I’ve run this quiz with hundreds of managers in workshops I’ve delivered. Everyone turns right away to math. No one asks question 3, at least not out loud. What good is an unasked question?)

We humans do two things with patterns. First, we see patterns. It’s part of how we figure out how the world works. We test perceived patterns with science, we accept perceived patterns as experience, we even enshrine perceived patterns as superstition.

The second thing we do with patterns is assume they will persist. After all, part of what makes a pattern a pattern is that it (seems to) persist. The tides, the sun, the scandals.

Patterns persist when the underlying forces persist. If the moon were destroyed by a Death Star, Earth’s tides would change. Over time Earth’s rotation (and hence the number and duration of sunrises and sunsets) is changing because… well, it’s complicated, and not germane to your competitor’s price. The length of a scandal is projected to rise and fall with the level of a society’s blaminess. Change the moon, Earth’s rotation, or a society’s blaminess, and the tides, sunrises, and scandals will change.

So what’s controlling your competitor’s price? You wouldn’t ignore the world and set your prices according to +10%, 0%, -10%. Neither would your competitor, unless they have turned over control of their prices to a trend-line equation that will next announce $895 in an eerie mechanical monotone.

Now we’re getting somewhere. What’s controlling your competitor’s price is how they make decisions. A strong pattern in prices is likely to mean that your competitor (or you) have linked prices to something. If their suppliers change prices periodically, then your competitor might change its prices to maintain their margins. If your competitor heavily incents its salespeople to make the numbers each quarter, their salesforce might lobby mighty hard for quarter-end price cuts. Or perhaps that’s how you have priced, and your competitor is predicting and responding to changes they expect you to make!

So which is it? Suppliers? Salesforce compensation? Competitive dynamics? Something else? The point is that people, not calendars, control prices.

Notice that the pattern, whatever’s behind it, makes it hard to know what your competitor will do if you make a change. What would happen if you raise or cut your price when you’re “supposed” to hold? Would they follow? If neither you nor they have deviated from the pattern in a while, you have no data to suggest what they will do. You have to understand your competitor, you have to get inside their heads, you have to model their business, you have to figure out why they price as they price.

Sidebar. I’ve run many, many business war games around the world. They always produce surprises (that’s a good thing) for the management teams that participate. Why? Most of those teams have already analyzed their strengths, weaknesses, opportunities, and threats; what surprises are left? Here’s why I think they get surprised. SWOT analysis mentally places you inside your own company and asks you what you think your competitor will do. A business war game, on the other hand, asks you what you would do if you were your competitor. The latter question explicitly encourages you to look through your competitor’s eyes; the former doesn’t. With the latter you understand them better, you get inside their heads, you model their business, you figure out why they act as they act. End of sidebar.

Intellectually we all know that no one delegates pricing decisions to a calendar. That said, take a look around and see how often people (maybe you and me too) assume patterns will persist. You will see people (maybe you and me too) frame problems in terms of patterns rather than understanding. Listen to pundits, read newspapers, look at analyses.

If you understand your competitors better, you can make better decisions. You can understand better how they will respond if you do this or if you do that. (Do you think they will raise their price to $895 no matter what you do?) Which is, of course, the reason why we try to predict them in the first place. We want to make better decisions for the environment we think we’ll face.

Update: See Predicting Competitors. This essay is about illusions about predictability; that one is about delusions of predicting.

Further reading:
It’s Working!
Precision In, Garbage Out
The Rules
You’re Got the Data. Now What?