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Have you heard about the Second Cheapest Wine?
It’s a wine that you buy in a restaurant when you don’t want to drain your wallet too much, nor come out as a penny pincher. You intensively scan the menu, desperately look towards the bottom of the list, and voila! The Second Cheapest Wine comes to the rescue.
As long as the strategy to go for the affordable but not the cheapest might turn out just fine at dinner, it doesn’t necessarily apply to business, and the software industry is not an exception.
I bring the wine example because SaaS companies tend to use a similar strategy to their pricing. It’s called competitor-based pricing, and I will break down the pros of doing it right and the cons of doing it wrong.
In this article, you will learn:
Competition-based pricing is a way of positioning your product’s pricing model based on how your competitors do it. You check a dozen similar tools, compare their prices, and develop your pricing strategy accordingly.
Usually, somewhere at the bottom - to compete with the price but not to be the cheapest. We know that from the interviews we have conducted with founders and CEOs, they’re usually pricing at lower quartiles of the pricing corridor if they apply the benchmarking strategy.
It doesn’t include just the price. You can copy the number of plans, discount policy, or whether you charge per seat, per feature, or if you charge at all.
SaaS companies love it because it’s easy to do and requires relatively low effort.
And as long as easy and effortless solutions don’t have to be wrong, competitor-based pricing, if done thoughtlessly, may lead to many business risks.
If done correctly, it will be a great source of clutch business insights about your competition and customers.
If your company is capable of conducting a competitive pricing analysis once in a while, then you’re up to date with your competitors’ pricing strategies. And this means you get the most potent resource there is - information.
You can understand the average price levels or define the most common value metric of the products. You establish a clear understanding of your advantages and disadvantages towards competitors and their selling points. You get to know if other businesses change their pricing strategies and in what way.
You know what you don’t know, and you know what you do know. Based on this knowledge, you can position your pricing strategies precisely and sell more to your target customers.
To give you an example, we have conducted such analysis for one client. It clearly shows that three-tiered packaging is the most popular on the market. The median price corridor is between $14-$20, so it already tells us if we’re shooting too high or too low.
Interestingly, we can also identify if the freemium acquisition model is in place or not.
Scanning your business environment forces you to create a specific culture of market research in the company. With the help of tools like G2, Capterra, Hexowatch, or Alexa, you can easily create, what I like to call, an insights factory.
And it doesn’t have to be limited to just the pricing. The longer and deeper the research goes, the more variables you can add:
All combined can give you a great market vision, which translates to more conscious business decisions.
As much as it does take the knowledge to do it properly, in general, it still is relatively easy. Once you establish a transparent methodology, all you need is a researcher and a repeatable process.
It also means that you can easily outsource it. Way easier than, let’s say, value-based pricing, which requires deep knowledge of your and your competitors’ features and their value on the market.
Let’s say that you’re building your SaaS from scratch. You have a problem to solve, a niche to nail, and, eventually, a marketing and product strategy to execute. You probably wouldn’t like to outsource any of those to your competition because they are yours. These components define who you are as a company.
In the same way, you shouldn’t outsource the pricing because if you do so, you openly agree that others have a pricing strategy, and you don’t.
Or, to put it differently: others charge for who they are and what value they bring to the world, and you don’t.
What you can do, though, is to ensure that you consciously take others under consideration but try to carve out a niche only for your product. There is no fault in knowing how much others are charging or which features or value metrics they own.
What you should do is not to follow blindly but use the data to identify differentiating chances.
For instance, just because most of the market goes with Good-Better-Best packaging doesn’t necessarily mean you need to do the same. Basecamp is one of the world’s best tools, and they do it with a very conscious all-in-one packaging strategy.
Knowledge is power. Following it blindly is a weakness.
It’s very tempting to assume that tools are similar, especially if their key features serve the same purpose. The reality, however, is that they rarely are. Depending on variables, such as:
the software is aimed at various clients, thus being priced differently.
Let’s take document signing tools as an example. You wouldn’t expect many differences among these; at the end of the day, they’re supposed to help you sign documents remotely.
And yet, DocuSign offers a wide array of integrations, so it’s a perfect choice for large-scale enterprises. HelloSign doesn’t have as many integrations, but it’s simple and straightforward, so its target audience is SMBs. PandaDoc, on the other hand, offers over 400 business document templates, which saves companies time on accountancy and law enforcement.
Comparing their pricing directly will lead to wrong assumptions and, by any means, won’t allow you to precisely adjust your pricing strategy to your tool’s value and position on the market.
Price Intelligently did a great pricing teardown between DocuSign and PandaDoc. Here you can see that because these, similar as it might seem, tools have different product strategies, their customers' Willingness to Pay is different, and so are their pricing strategies.
Via https://www.priceintelligently.com/docusign-pandadoc-pricing-page-teardown
Competition-based pricing strategy, if done right, takes from 20 to 30 hours of well-aimed market research. It requires proper methodology, benchmarking, calculating customer value, and economics conversion. And a whole lot of well-organized spreadsheets.
If you can’t develop a good logic for the market price research, then there are big chances that the results won’t be relevant. And, worst-case scenario, you will aggregate data in a way that wouldn’t allow you to make any use of them in future comparisons.
The answer is simple: always.
It is never the wrong time to be up to date with what’s happening on the market, no matter if you’re an early-stage startup or a fully grown SaaS company with millions of users.
Just keep in mind that competitive pricing is a double-edged sword and, if done thoughtlessly, may lead you to deadly wrong assumptions. Think of it as an element of your pricing strategy and a great source of information, not as a direct tool to translate your product’s value.
Competitor-based pricing can be a valuable strategy when used wisely. It provides insights into the market, allowing businesses to understand their competitors' pricing strategies and position themselves effectively.
Of course, conducting thorough research and analysis enables companies to make informed pricing decisions and identify opportunities for differentiation. It’s important to use competitor-based pricing as part of a well-rounded approach.
Ultimately, a thoughtful and data-driven pricing strategy will help businesses thrive in highly competitive markets.
If you need any pricing consulting services, contact Valueships.
Competitor-based pricing is a strategy where companies set their product's pricing model based on their competitors' prices, plans, and discount policies. It involves analyzing similar tools or products in the market and positioning pricing somewhere competitive but not necessarily the cheapest.
Companies opt for a competitive pricing strategy to gain insights into the market and understand their advantages and disadvantages compared to competitors. It helps them determine average price levels, identify common value metrics, and stay up to date with pricing trends and changes in the industry.
Competitor-based pricing provides valuable market information, improves research capabilities within the company, and is relatively easy to implement. It helps companies understand their target customers' expectations and position their pricing strategies effectively to increase sales.
Implementing a competitor-based pricing strategy requires scanning the business environment, which promotes a culture of market research within the company. It involves using tools like G2, and Capterra, to gather insights on competitors' pricing, marketing activities, new clients, and investments, leading to more informed business decisions.
By solely relying on competitors' pricing strategies, a company may lose its unique positioning and value proposition. Also, assuming that similar tools have the same pricing can lead to false positives, as each product may have different features, target audiences, and value propositions.
Assuming that similar tools or products have identical pricing can be misleading. Different variables, such as scalability, features, or target audience, can lead to varying prices. It is essential to consider these factors when comparing pricing strategies and avoid making inaccurate assumptions.
Implementing competitor-based pricing involves around 20 to 30 hours of dedicated market research, proper methodology, benchmarking, and data organization. Without a well-developed research logic, the results may not be relevant or usable for future comparisons.
You should continuously monitor and compare pricing strategies to stay updated with the market, regardless of the company's stage or size. However, it’s crucial to approach competitor-based pricing as part of a comprehensive pricing strategy and use it as a source of information rather than relying solely on competitor data.
It allows you to understand the average price levels and value metrics in the market, enabling you to position your pricing strategies effectively. By identifying differentiation opportunities and leveraging market insights, you can create a unique pricing strategy that aligns with your product's value and target audience.
While competitor-based pricing provides valuable pricing insights, it is important not to blindly follow competitors. Instead, use the information to make informed decisions and carve out a niche for your product. Focus on understanding the market dynamics, pricing trends, and your own value proposition to develop a well-rounded pricing strategy that sets you apart from the competition.
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Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.
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Expert in B2B pricing, monetization and value-based selling strategies. Over the past year, he has completed over 40 consulting projects in Europe. Prior to founding Valueships, he worked at McKinsey & Company, mainly in the TelCo, software, and banking industries. He completed his doctorate in pricing in SaaS start-ups at the University of Economics in Wrocław, where he also lectures.
