Pricing
What is Competitive Pricing Strategy?
Competitive pricing is one of the most popular pricing strategies. But does it work for SaaS businesses? This article will examine the advantages and disadvantages and provide an overview of competitor-based pricing.
When you’re just starting to acquire your first few customers, there might not be enough data to understand the pricing fit of your customer base. Therefore, you can use data from competitors who have been in the market for a while to aid your pricing strategy as you test the waters for yourself.
73% of subscription leaders reported in the 2024 State of Subscriptions and Revenue Growth that they plan to increase prices.
How to implement a competitive pricing strategy
Implementing a competitive pricing strategy involves a few key steps. Here's an overview to get you started:
Research your competitors: Look at direct competitors, who sell something very similar to your product, and indirect competitors, who might meet the same customer needs but in a different way.
Analyze your competitor's pricing: Collect data about how much your competitors are charging. Don’t just look at the numbers; try to understand the features and benefits they’re offering at those prices and the perceived value they offer.
Decide your pricing position: Based on your analysis, decide where your product or service fits. If your product has more features or better quality, you might price it higher. If you’re new and trying to enter the market, you might set a lower price to attract customers.
Monitor the market: Markets change, new competitors emerge, and customer preferences shift. Regularly review your pricing strategy and adjust as needed to stay competitive.
This way, your pricing reflects the market landscape and supports your business goals and product value.
What are some common competitive pricing strategy mistakes to avoid?
When implementing a competitive pricing strategy, businesses often make several common mistakes that can impact their success.
Lack of comprehensive market research: One major mistake is not conducting thorough market research. Businesses might base their prices solely on the most visible competitors or outdated information, missing out on broader market dynamics and newer competitors. It’s crucial to continuously gather and analyze data from direct competitors and indirect ones to get a comprehensive understanding of the competitive landscape.
Ignoring value proposition: Another common error is pricing solely based on competitors without considering their own product’s value proposition. If you price a product without understanding why it’s valuable to customers, you risk underpricing, which erodes profits, or overpricing, which deters potential buyers. It’s important to know what differentiates your product and to price accordingly.
Not being flexible: Pricing isn’t a set-it-and-forget-it element. Markets evolve, new competitors emerge, and customer preferences change. A common mistake is not revisiting your pricing strategy regularly. You need to be agile and ready to adjust your pricing to stay competitive and relevant in the market.
By avoiding these common competitive pricing pitfalls, you can better leverage competitive pricing strategies to your advantage and ensure you attract and retain customers without compromising on profitability.
How often should a business reassess its competitive pricing strategy?
You should reassess your competitive pricing strategy regularly. Market conditions can change rapidly—new competitors may enter the market, existing competitors might adjust their pricing, or customer preferences could shift. By reviewing your pricing strategy frequently, you can ensure that your business remains competitive and adapts to any significant market dynamics.
Furthermore, more frequent reassessments may be necessary during rapid growth, product launches, or significant external changes like economic shifts or regulatory changes. Staying proactive with these reviews helps you capitalize on opportunities to refine your pricing for better market alignment and profitability.
How is competitor-based pricing calculated?
To arrive at a reasonable pricing decision that maximizes profit margins, group your competitors according to relevance in ascending order and see where your product and brand fit in the range between them.
With a competitive pricing strategy, you have two different types of competitors you need to be aware of while grouping them:
Direct competitors: Direct competitors offer similar products or services and compete for the same market share.
Indirect competitors: Indirect competitors offer products or services that will overlap with yours and partly solve the problems in a completely different way. They may be products with one or two similar features to yours and don’t compete for the same market share.
How does competitive pricing strategy impact market positioning?
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 you can use to 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 your products or services 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 offers, even though your product and its features are the same as your competitors.
Pricing below the competition: Pricing below competitors should not be a strategy unless your product has limited features. It can be effective to offer a competitive price to attract customers, increase sales, and promote brand value.
How does a competitive pricing analysis help a business?
Competitive pricing analysis helps you by providing crucial insights into the pricing landscape of your market. By understanding what competitors charge and the value they offer, you can strategically position your pricing to attract more customers, maximize profits, or enter new markets. It allows you to identify pricing opportunities and threats, align your pricing strategy with market expectations, and remain competitive without sacrificing profit margins.
Advantages of competitor-based pricing
Simplicity - A competitor-based pricing model is straightforward to implement as it requires basic research and insight into who your competitors are and what they’re doing with products 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 need to be corrected if you base it on theirs.
Used with other pricing strategies - A company can calculate its pricing based on a value-based or cost-plus pricing model. But, before arriving at a final price solely based on the above two models, you can compare yourself with the competition and adjust your pricing to be on par with your competitors. By combining two models or using a hybrid, 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 the long term - A competitive pricing strategy can be sustained during the initial stages of market entry. Still, as you progress, you may not be able to use it long-term. Your competitors might be improvising based on the market pricing data or might change pricing entirely with a change in marketing strategy to focus on a different market segment. This is a model attributed to short-term goals, and you could tank 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 on what someone else has to offer. You will soon need to adjust your pricing strategy based on consumer demands and market insights.
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 go wrong, you go wrong, as well. Your future profits and revenue might be hit by relying on someone else’s 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 broader herd offering the same products and services at the same price. This will not help your brand stand out, and you will not be able to explain why your product is priced this way to your customers.
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 most significant setback is that your 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 about choosing your competitor's product for a similar price.
In addition, you will have no price intelligence as to why a particular set of features is bundled together and offered for that specific price. Competition-based pricing can be likened to plagiarism if used in isolation, offering only short-term market sustainability.
Saas Pricing Masterclass: Ace your SaaS pricing strategy with the lessons in this 25-minute masterclass.
Final thoughts on competitive pricing strategy
A competitive pricing strategy is critical for businesses looking to maintain a strong market position without compromising profitability, particularly in dynamic sectors. While it's a common approach in B2C spaces, especially E-Commerce, B2B SaaS companies should use competitor data to inform rather than dictate their pricing strategies. Considering variables like product value and functionality is essential, as these factors ensure that pricing strategies are competitive and reflect the actual value offered. Integrating competitive pricing with other pricing models can help maintain market competitiveness in the short term and add substantial value over time.
By routinely reassessing your pricing strategy and adapting to market and competitive changes, your business can effectively respond to customer needs and preferences, ensuring long-term sustainability and success. If you're ready to dive deeper and tailor your pricing strategy to your needs, connect with our experts.
Book your complimentary pricing consultation here for personalized advice and insights to navigate pricing complexities and drive your business forward.