Want to know how to win a price war? In this post, learn tips and strategies on how to protect your SaaS business from disruptive pricing tactics. Discover the best ways to maintain profit margins, differentiate products, and stay competitive in the market.
E-commerce pricing is a tough beast. You must take into consideration the rivalry from other merchants, but you also don't want to sink to the bottom by undervaluing your goods. Purely competitive pricing may produce unsatisfactory results since you may not sell enough to make up for the lowest prices.
Psychological pricing has been evaluated by a number of organisations for years, but understanding how it works in omnichannel commerce is critical due to the severe competition among online vendors. Sellers are able to outsell rivals when they set prices in a way that encourages customers to buy while maintaining the value of their goods.
A successful pricing plan takes into account both your customers' motives and the prices of your competitors. Sellers set prices that stimulate purchases based on their knowledge of how prospective purchasers make decisions.
How does competitive pricing strategy work?
In order to test product pricing, especially if you're new to the market, competitor-based pricing is frequently employed. To develop your own pricing strategy, you must conduct extensive research on what your competitors are doing, what they provide, and what prices they charge. There might not be enough information available when you're just getting your first few consumers to determine whether your pricing strategy is appropriate for your clientele. This is why competition data can be useful when you’re testing out the waters.
How are prices depending on competitors determined?
Find where your product and brand sit in the spectrum between your competitors by grouping them together prior to deciding on a price.
- Direct rivals: Direct rivals engage in direct competition for the same market share and provide comparable goods or services.
- Indirect competitors: Indirect rivals provide goods or services that overlap with yours and partially address the issues in a completely other manner. They might be goods that merely share one or two of your product's capabilities and don't directly compete for the same market share.
You must first determine where your product fits in the market before understanding competition pricing and determining how to price it. After carefully examining your competition, there are three ways to set the pricing of your product.
- Pricing above the competition: offering goods or services at a higher price than your rivals. It is typically done when you believe your offerings are a cut above those of your rivals.
- Pricing on the same level: Your product is priced similarly to that of your rivals. However, even though your product and its characteristics are the same as those of your rivals, your main attention should be on the added value it provides.
- Pricing below the competition: If your product is constrained in terms of features and functionality, pricing below the competitors shouldn't be an approach. It can also be used when you wish to offer your customers competitive pricing in an effort to get their attention, boost sales, and improve the value of your brand.
What are the primary elements influencing pricing strategy?
- Size of the company: Are you a well-established SaaS company or are you just entering the market?
- Competitors: What benefits do prospective customers get from your competitors' products? Who are your competitors?
- Business objectives: What are your objectives? Do you want to increase your sales, gain market share, or control the market?
- Value Proposition: What distinguishes your SaaS from the competition? What attributes or capabilities do you provide that your rivals don't?
- Customer persona: Why do your customers need your product or service, and who are they?
Different SaaS Pricing Techniques
There are several various SaaS price plans. Each offers advantages based on how….
- Your company's present state of play in your industry
- Your specific business goals
- How long it has been in operation
Let's examine each SaaS pricing model to determine which is the most effective for you.
- Competitor based pricing
Many young SaaS businesses model their pricing on their rivals. Essentially, this is setting your cost based on a comparable SaaS product.
For start-up businesses, this SaaS pricing strategy is a fantastic choice. If your product hasn't been on the market for very long, you might not have accumulated enough data to determine whether it really adds value. You can obtain a fair notion of what clients are willing to pay by observing your rivals.
You can determine where your product will fit once you have a clear idea of what your competitors are providing and information on their price points.
You have a choice of three routes: above, below, or the same price.
Pricing above the competition: If your SaaS company provides clients with more features and functionalities than competing services, charging more may be the appropriate pricing strategy.
Pricing below the competition: When you need to gain clients quickly, pricing below the competition is a solid tactic. Gaining market share may be facilitated by providing a comparable offering at a low cost.
Price matching is the term used to describe this tactic of pricing at the going rate. The goal is to give a pricing that is fairly close to that of your rivals while emphasising added value.
A B2C SaaS provider that bases prices on competitors would be Hulu. Their pricing structure and business approach have many characteristics to Netflix, a rival streaming service. However, it's a little bit less expensive to account for their significantly less original programming, a smaller selection of shows, and the presence of advertisements.
The key point from this is that Hulu priced its service in accordance with what the typical Netflix consumer is willing to spend.
- Penetration pricing strategy
An aggressive market entry is the goal of a penetration pricing strategy. This is a good SaaS pricing plan for startup businesses.
The main aspect of this is that you start off by charging a modest price for your goods or service. For instance, you might use this as a brief introduction offer. In essence, you are attracting customers to your software by offering a discounted price.
Pricing can be used in a number of different ways to increase market penetration. By giving your initial few consumers a lower price, you can generate demand. Alternatively, you may charge depending on how soon people sign up.
A notable instance of a penetration SaaS pricing approach is Disney Plus. Their initial price point was $6.99, which was far less than that of other streaming services like Netflix.
With future price increases being sought after, Disney+'s pricing has increased to $7.99 as its value proposition has grown.
Pricing your goods below its worth when your rivals are much more established is a sound business strategy. You can gradually add higher pricing once you've established reader familiarity (and a presence in the market).
- Cost-plus pricing
Cost-plus pricing, commonly referred to as markup pricing, figures out your company's expenses and then adds a percentage on top of that. Although the SaaS sector also makes use of this paradigm, production is where it is most common.
This amount can be calculated by summing the costs associated with staffing, client acquisition, and development (CAC). For instance, you can charge $150 to guarantee you always make a profit if it takes $100 to build and sell your programme.
Manufacturing and other retail establishments provide the most effective instances of cost-plus pricing. Because expenses might fluctuate, cost-plus as a pricing model for SaaS isn't always simple to execute. It becomes difficult to maintain raising your rates to guarantee your desired % profit if development and CAC increase.
However, if you're selling a real item, you are aware of the expenses associated with manufacturing each one. Additionally, customers may tolerate a certain amount of price elasticity for tangible items.
- Value-based pricing
Value-based pricing plans put the needs of the client first. They base a product's price on the value customers will receive from it and their willingness to pay for it.
This approach doesn't just focus on your production expenses or the prices of your rivals. Instead, it takes into account the needs or wants of your target audience for your solution.
Customers are ready to spend more when you offer value. Companies that have a product with greater features and functionality than their competitors frequently use this business model.
A great illustration of a value-based SaaS pricing model is the product line from Adobe. They are highly known, dependable, and have distinctive products that are jam-packed with features and functionalities.
The pricing page for Adobe includes a variety of goods with a range of costs for each type of consumer, including people, businesses, and educational institutions.
Is competitive price analysis appropriate for SaaS?
Competitor-based pricing may not be the best pricing model for many SaaS enterprises. It can be used in conjunction with another pricing model, but it cannot be the only pricing metric employed. The major drawback is that your pricing strategy is reliant on that of your competitors. The value you provide for your customer is not equal to the price. Your product offerings won't be represented fairly, and the value of your goods will decline as a result of the noise. Your customer might prefer your competitor's product at a similar price if you are not viewed as having value as a product. Additionally, you won't know why a specific combination of features is supplied in a package at a given price since you lack price intelligence. When used alone, competition-based pricing is a bad case of plagiarism and will only help you stay in the market for a brief period of time.
Think about your customers, not just your rivals.
Pricing that is sustainable and effective takes into account more than just the prices of your rivals; it also takes into account the motivations of your customers. By adopting psychological pricing, sellers can keep a competitive advantage over rivals, especially with the use of ecommerce analytics, without having to provide low, unprofitable prices.
You'll stimulate sales while enhancing your brand, your comprehension of your clients, and your product positioning when you price your products in a way that you know will appeal to your customers.