For the SaaS industry, competitive pricing refers to the strategy of setting prices for a SaaS product or service in a way that positions it competitively within the market. Doing so requires competitive analysis of your competitors’ pricing, the value that your product offers, and the preferences and habits of the target customer audience.
There are many factors that go into the calculation of competitive pricing for SaaS. Some aspects to consider, include:
Market Research: This includes understanding the overall market as well as the place of competitors’ products, pricing models, and strategies. This should be done with an eye to competitor pricing tiers, features, and any discounts or promotions offered.
Value Based Pricing: This involves analyzing the value that the SaaS product provides based on the benefits brought and problems solved.
Differentiation: This involves how a company differentiates its product from competitors, and factors included pricing models and add-ons.
Tiered Pricing: This strategy involves creating multiple pricing tiers or plans that cater to different customer segments. This allows customers to choose a plan that best fits their needs and budget.
Freemium or Free Trial: Many companies offer a freemium or a free trial of their SaaS product to attract potential customers.
Dynamic Pricing: Dynamic pricing is a situation in which the price can vary based on factors like usage, the number of users, or specific features. This can maximize revenue from different types of customers.
Competitive Analysis: Continuously monitor your competitors’ pricing strategies and be prepared to adjust your pricing as the market evolves. Competitive pricing is an ongoing process.
Promotions and Discounts: Promotions and discounts used strategically can attract new customers or incentivize upgrades from existing customers.
Pricing Reviews: Companies should regularly review and adjust pricing strategy based on market changes, customer feedback, and your product’s evolution.
Remember that competitive pricing in SaaS is not solely about having the lowest price. It’s about finding the right balance between the value you offer and the price you charge, while remaining competitive in your market segment. Ultimately, your pricing strategy should align with your business goals and target customer base.
Competitive pricing is essential for a number of reasons:
Attracting and Retaining Customers: Price is a critical factor for customers when choosing any product or service, and a good price can help to acquire new customers and retain existing ones.
Market Share and Competition: Competitive pricing helps companies gain market share by giving a business a competitive edge.
Maximizing Revenue: Pricing a product or service too high can lead to fewer customers, while pricing it too low can leave money on the table. Competitive pricing aims to strike a balance between attracting customers and maximizing revenue.
Churn Reduction: If a business’ pricing is competitive, customers are less likely to consider switching to a lower-priced alternative. This can help reduce customer churn, which is important for long-term profitability.
Pricing Strategies: Competitive pricing allows you to implement various pricing strategies, such as tiered pricing, usage-based pricing, or freemium models, to cater to different customer segments and use cases.
Expansion and Upselling: Competitive pricing can lead to expansion and upselling opportunities. Customers who start with lower-priced plans may upgrade as their needs grow, contributing to increased lifetime value.
Cost Efficiency: Competitive pricing encourages a business to manage its operational costs efficiently. It incentivizes cost control and optimization to maintain healthy profit margins.
With a competitive pricing strategy, a company takes a number of factors into account – including customer behavior, market trends, competitive activity, and demand cycles – when determining a price. Some competitive pricing strategies are:
Market-Matching Pricing: This strategy involves setting prices at the same level as direct competitors.
Price Leadership: In some cases, a company may opt to become a price leader in the market by setting the lowest price among competitors. This strategy is often used to gain market share and attract price-sensitive customers.
Premium Pricing: While competitive pricing typically focuses on matching or undercutting competitors, a premium pricing strategy involves setting prices higher than those of competitors. A company might take this strategy if they have a feature that justifies the higher cost.
Discount Pricing: Offering occasional discounts, promotions, or special pricing deals can be a competitive strategy.
Freemium Model: This model offers a basic version of a product or service for free while charging for premium features or advanced functionality.
Tiered Pricing: Implementing tiered pricing allows a business to cater to a broad range of customer segments, allowing the business to offer different plans depending on customer need or size.
Usage-Based Pricing: This model charges customers for the amount of a service that they use. This can be a competitive strategy for the SaaS industry, especially if customers value the flexibility of paying only for what they use.
Bundling: For some companies, another option is to bundle multiple products or services together and offer them at a discounted price compared to purchasing each separately.
Dynamic Pricing: With this model companies adjust prices in real-time based on various factors, such as demand, customer behavior, or market conditions.
The goal with competitive pricing is to remain competitive and attract customers by offering prices that are in line with or slightly below the prices of competitors.
Here’s an example using smartphone pricing:
A company that sells smartphones in in a market in which several competitors are offering similar smartphones with varying features and quality. To maintain competitiveness, the smartphone company decides to employ competitive pricing strategies.
Market Analysis: The smartphone company first starts by conducting a thorough analysis of its competitors’ pricing. The smartphone company discovers that its main competitors are offering smartphones in a price range of $300 to $500 for similar models with similar features.
Setting Prices: The smartphone company decides to price your smartphones within this range, aiming for the lower end. It offers a basic model for $299, a mid-range model for $399, and a high-end model for $499. This pricing strategy aligns with the market’s price expectations.
Promotions and Discounts: The smartphone company occasionally runs promotions or discounts to further attract price-sensitive customers. For example, it offers a 10% discount during a holiday sale, bringing the price of its basic model down to $269.
Value Proposition: To differentiate its products and justify the pricing, the smartphone company focuses on creating value for customers. This might include emphasizing its smartphones’ unique features, superior customer support, or warranties.
Regular Monitoring: The smartphone company regularly monitors the market to see if competitors change their pricing. The smartphone might consider adjusting its prices accordingly should a competitor lower its prices.
Customer Feedback: The smartphone company collects and analyzes customer feedback to ensure that its products meet their needs. The smartphone company adjusts product offerings should a majority of customers say they want better prices or different features.
In this example, competitive pricing allows the smartphone company to stay competitive in a crowded market. It helps attract price-conscious customers and positions the company’s products as valuable choices within a competitive price range. This strategy requires continuous market monitoring, flexibility, and a strong focus on delivering value to customers.