What is Competitive Pricing Strategy?

Competitive pricing is one of the popular pricing strategies. But does it work in SaaS? Let’s take a look at the advantages, disadvantages & overview of competitor based pricing.

Competitor based pricing is commonly used to test product pricing, especially if you’re new to the market. It requires thorough research on what your competitors are doing, what they offer and at what price they offer in order to arrive at your own pricing strategy. When you’re just starting to acquire your first few customers, there might not be enough data to understand the pricing fit from your customer base. Therefore, you can use data from competitors who have been in the market for awhile to aid your pricing strategy as you test the waters for yourself.

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How is competitor based pricing calculated?

In order to arrive at a reasonable pricing decision that maximizes profit margins, group your competitors together according to relevance in ascending order and see where your product and brand fits in the range between them.

With a competitor based pricing strategy, you have two different types of competitors you need to be aware of while grouping them together:

  • Direct competitors: Direct competitors offer similar products or services and compete for the same market share.

  • Indirect competitors: Indirect competitors offer products or services which will overlap with yours and partly solve the problems in a completely different way. They may be products that might have only one or two similar functionalities as yours and don’t compete for the same market share in a wholesome way.

After finding your product’s fit in the market, and accounting for internal expenses such as production costs, you must now understand competitive pricing and analyze how to price the product. There are three methods as to how you can price your product after doing a thorough analysis of your competitors

  • Pricing above the competition: Offering products or services priced superior to your competitors. It is usually done when you feel the products or services you offer are a notch above your competitors.

  • Pricing on the same level: Also known as price matching. You price your product similar to that of your competitors. But here, your primary focus should be on the added value your product has to offer even though your product and its features are the same as your competitors.

  • Pricing below the competition: Pricing below competition shouldn't be a strategy, if at all, you would do so if your product is limited in terms of features and functionality. It can also be adopted when you want to provide a competitive price for your customers in order to grab their attention, increase sales and your brand value.

Advantages of competitor based pricing

  • Simplicity - A competitor based pricing model is very simple to implement as it requires basic research and insight into who your competitors are and what they’re doing with product and prices. It takes only a few hours to arrive at a decision for the same.

  • Low Risk - Since your competitors are well-known players in the market and have been around for some time, the chances are slim that your pricing strategy might go wrong if you base it according to them.

  • Used in conjunction with other pricing strategies - A company can calculate their pricing based on a value based pricing model or a cost-plus pricing. But, before arriving at a final price solely based on the above two models, you can compare yourself with the competition and modulate your pricing a bit in order to be on-par with your competitors. By combining two models, you’ll be aware of the market and have a sound strategy to stay ahead of the competition while covering your costs.

Disadvantages of competitor based pricing

  • Unsustainable strategy in long term - A competitor-based pricing strategy can sustain during the initial stages of market entry, but as you progress you cannot use it long-term. Your competitors might be improvising based on the market pricing data or might change pricing completely with a change in marketing strategy to focus on a different market segment. This is a model attributed to short term goals and you’ll be casketing your profits in the long run if you follow the same strategy, because as you scale you need to evolve your pricing strategy based on your product and not based on what someone else has to offer. You soon to be account for consumer demands and other market information.

  • Don’t have access to the details and reasoning for the pricing - When you’re implementing a competitive based pricing model, you’ll be missing out on the details your competitors might have and if they went wrong, you go wrong as well. You future profits and revenue might take a hit from relying on someone elses strategy.

  • One amongst the herd - Since it’s a strategy implemented solely based on your co-market players, you will not be seen as different and will be a part of a huge herd offering the same products orand services at the same price. This will not help your brand stand out and you will not be able to explain to your customers why your product is priced in this particular way.

Is competitive pricing analysis right for SaaS?

For many SaaS businesses, competitor based pricing may not be the right pricing model. It can be combined with another pricing model but not solely used as a stand-alone pricing method. Also, while it is the sole purpose of the strategy itself, the biggest setback is the fact that you’re pricing is based on your competitors' pricing method so the price doesn’t equate to the value you’re providing for your customers. It doesn’t do justice to your product offerings and the value of your product will likely get diminished with the crowd. If you aren't perceived for your value as a product, your customer might not think twice to choose your competitor's product for a similar price. In addition, you will have no price intelligence as to why a particular set of features are bundled together and offered for that specific price. Competition based pricing is a bad case of plagiarism when implemented alone and will help you sustain in the market only for a short while.

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Some businesses in the B2C space, especially E-Commerce, might be wholly dependent on competitive pricing but in B2B SaaS, competitor data shouldn’t directly translate as a central focal point for your pricing strategy. It can help inform your pricing strategy, but cannot be the sole basis for the final price. There are variables that need to be considered such as value and the extensive functionality of what your product can do and accomplish. With competition based pricing you’ll be able to keep up with your competitors in the short term but when it is properly used in conjunction with other pricing models, it can be a valuable addition to your pricing strategy.