Competition-Based Pricing Strategy: Is It Good For SaaS?
No matter how great your product is, a poor pricing strategy for your SaaS will place you behind competitors and can eventually result in failure. The choices you make for your pricing model and pricing strategy are crucial because they determine profitability and growth.
There are a number of pricing strategies that help determine how much you should charge for your product. One of these strategies is competition-based pricing.
In this article, I will be providing details about what this pricing method is, its advantages, and its disadvantages. I will also give some examples and evaluate the effectiveness of this strategy for SaaS companies so that you can make an informed decision.
What is Competition-Based Pricing?
Competition-based pricing is a strategy in which competitors’ prices are taken as a basis for determining the prices of products and services. Factors such as production costs, product value, and consumer demand are not taken into consideration when setting prices.
This method is often used in highly competitive markets consisting of businesses that sell similar products. It is most appropriate for substitutable products whose brands are not a matter of great importance to customers and users.
Using competition-based pricing for your SaaS can be a good idea at the early stages of your business when you haven’t yet attracted enough users to be able to evaluate your pricing model. With the assumption that competitors already have pricing intelligence, using their pricing as a reference can be a low-risk strategy to begin competing in the market.
Once you’ve researched about competitors’ prices, there are 3 ways in which you can set your own:
- Higher than competitors: Setting prices higher than other players in the market indicates that you have distinctive, valuable features and benefits that are not offered by others
- Lower than competitors: Offering products at lower prices than competitors can be advantageous in terms of attracting users, but it may also create skepticism about your product quality and credibility. This approach comes with the risks of a low profit margin and inability to cover costs.
- Equal to competitors: If you set prices along the same lines as your competitors, you should focus on accentuating your product’s value in order to stand out. This can be done by increased marketing and branding efforts.
Advantages of Competition-Based Pricing
The main reason why competition-based pricing is appealing is that it’s a relatively easy pricing strategy. Though it does require you to gain knowledge about competitors, you don’t need to do extensive research and calculations, unlike other pricing strategies. All you need to do is find out how much your competitors are charging and make decisions for your own prices accordingly.
Research into competitors’ prices gives an overall idea about how much users are willing to pay. If the pricing is working effectively for competitors, though it does not ensure success, there is a good reason that a SaaS offering similar services won’t go bankrupt with similar prices.
3. Moderate Pricing
This method prevents you from setting extreme prices that are too high or too low so that your pricing is appropriate for market standards.
4. Reduces chances of stakeholder rejection
Stakeholders in distribution channels expect prices of products to be within market range, so distributors are more likely to accept prices similar to those of the competition.
5. Can be used with other pricing strategies
Competition-based pricing can be more effective when it is used with other strategies. For instance, if your primary strategy is value-based or cost-plus, you can compare your pricing with competitors to make sure it is not too divergent from theirs before finalizing it. This can help you both cover your costs and maintain a competitive advantage.
Disadvantages of Competition-Based Pricing
1. Limited flexibility
By definition, competition-based pricing focuses on the prices of competitors. This method essentially assumes that many other factors that can affect your profit margins, such as production value and cost structure, are identical to those of your competitors. In reality, though, this is clearly not the case. You might have differences such as higher fixed costs or a highly differentiated product.
Such differences call for additional considerations you need to make in order to get higher returns. For instance, if your product has exclusive features, you might be leaving money on the table if you set identical prices to competitors.
2. Ignores consumer demand
This method fails to take into account that your competitors may have features and capabilities that cater to a certain demographic which is not necessarily the same as your target market. It’s not very sensible to go after their pricing if their users are different than yours.
3. Perception of being ordinary
Price is one of the first things that users notice about your product. If you base your prices on the market average, you will be perceived as just another SaaS offering similar product solutions. Users won’t have a reason to expect unique offerings from your brand.
4. Long-term inefficiency
There are many changes that can occur in the long run. Competitors may adjust their prices due to a variety of factors, such as a difference in marketing strategy or an increase in product value. Blindly incorporating these changes into your pricing would not be suitable for your SaaS.
5. Wrong reference point
It can be the case that the competitor has set ineffective prices, so taking their price as a reference would be the repetition of a mistake. Or it could be that the competitor is not actually a direct competitor and is incorrectly identified as one. Once again, this would be the wrong reference point for setting prices.
Is Competition-Based Pricing Model Good For SaaS?
At first glance, competition-based pricing can seem like a very attractive strategy for setting prices because of how simple and seemingly less risky it is. This can indeed be true. At the start of your business, it can be a better idea to offer prices to users that they’re used to, rather than incorrectly estimating the value of your product and giving it the wrong price.
However, competition-based pricing is not a very promising approach in the long term. It is overly dependent on competitors’ prices and ignores how much value your product actually brings to the user. You may have software for which users are willing to pay more (or less).
Moreover, even if this pricing works in the short term, the changes that will arise over time for your business and your competitors will ultimately render it ineffective.
This doesn’t mean that you shouldn’t be aware of the features and value metrics of your competitors. Researching how competitors charge their products can help gain an understanding of the market and of users, and even help identify opportunities on how you can differentiate your product. In fact, even if you opt for a different pricing strategy, competitors’ prices will still influence yours to an extent since you can’t completely disregard the market.
A more effective and profitable way to set prices is based on value, called value-based pricing. Value-based pricing focuses on how much users are willing to pay for your product. If you offer the high value that users demand, you can have the freedom to increase prices. Though this method does require lots of research and commitment towards understanding users.
You can also choose to use a competition-based pricing strategy in conjunction with other strategies. To find out which strategy works best, it’s important to do research about each and test them out.
How to Measure Your Pricing Plans’ Effect On Your SaaS?
If you want to understand which plan leads to the highest number of customer support tickets, product engagement, referral revenue, etc., you need HockeyStack.
HockeyStack is an end-to-end analytics tool for SaaS companies. With HockeyStack, you can track and analyze data from the product, sales, subscription revenue, and marketing in one tool and get access to hidden insights, such as the LTV of a piece of content, or the churn rate of each marketing channel along with users’ reasons for churn.
HockeyStack allows you to build dashboards with no code using any metric you need from any department!
HockeyStack offers these features with no code:
- Step-by-step user journey
- Custom dashboards
- Funnels and goals
- Attribution analysis
- Revenue analytics
HockeyStack has a free forever plan and 3 paid plans. Paid plans have a 14-day trial with a 30-day refund guarantee.
You can check out the pricing page here.
- Crisp Chat
- Salesforce (coming soon)
- Zapier (coming soon)
Competition-based pricing is an attractive pricing strategy since it is simple to execute, less risky than other pricing methods, and allows prices to stay within the market range. However, it is not necessarily the best strategy because it focuses only on competitors’ prices, and pricing for SaaS is too dynamic to be based on one variable. It ignores other significant factors such as production value and user demand, which play a huge role in the profitability of any SaaS.
Competition-based pricing can be more suitable for new businesses that have yet to figure out their product’s value through data from users. Although this pricing method is used by large firms too, it is usually a part of the pricing strategy and not the central focus.
Competitive pricing analysis refers to a comprehensive examination and analysis of competitors’ pricing to compare it with your own. To do the analysis, you should first assess your position in the market and find out who your competitors are. Then, conduct thorough research on their processes and product, and figure out their strengths and weaknesses.
You should also analyze competitors’ websites for any imperfections and compare them with your own. Finally, you should compare your value propositions with the competition in order to optimize and get ahead of competitors.
The 3 main types of competition-based pricing strategies are promotional pricing, penetration pricing, and captive pricing. Promotional pricing is a strategy of offering promotional deals for products and services to increase sales. Penetration pricing is a strategy of entering the market with low prices to attract customers and gain market share. Captive pricing is a strategy in which a company offers a core product along with accessory products that serve to enhance the core product.