Blog / InspirationTuesday, June 16, 2020

The full guide [2020] | Beat your competitors by creating competitive pricing strategies

Anne Egdal

The full guide [2020] | Beat your competitors by creating competitive pricing strategies

Pricing your products and services is something you must get right.

Doing so isn’t always easy, particularly in the SaaS space where you need customers to become long-term subscribers or buy a license for use to succeed.

While there are several pricing strategies you can use, whichever one you choose will need to satisfy at least some shared factors:

  • Your price should reflect the quality of your SaaS platform and the value it provides.
  • Your price should allow you to make a healthy profit margin, either from selling a license or via cash flow from recurring payments.
  • Your price should allow you to be competitive in your niche.

You might decide to focus on one factor more than another.

For example, if you have built a premium SaaS product, you could price it high as a means of making clear how highly you value and believe in your product. You might opt for a strategy that finds the sweet spot between price and subscribers to maximize revenues and profit.

Alternatively, you could use competitive pricing to inform your strategy.

 

What is Competitive Pricing?

Competitive pricing is the most popular pricing method businesses use. The idea behind competitive pricing is simple but executing such a strategy isn’t always straightforward.

The biggest mistake businesses make when implementing competitive pricing is oversimplifying what they do. Merely building a product and then selling access at a lower price than your competitors is a competitive pricing strategy. Still, it isn't what competitive pricing is.

The most important thing to understand is that your competitive pricing is unique to your business. Competitive pricing doesn't mean involving your business in a "race to the bottom" to see who can offer a product at the lowest price. "Price wars" might happen, but it isn't something in which you want to involve your business.

True competitive pricing considers differences in value proposition rather than having a 100% price focus.

One of the main drivers of competitive pricing is the actions customers take. If customers always gravitate to the lowest price, a competitive pricing strategy will look different from a scenario where a customer gravitates to the best value metrics.

Once you know how customers in your niche behave, you can tailor your competitive pricing strategy accordingly.

 

How to Use Competitive Pricing in Your SaaS Business

Competitive pricing

There are three ways you can approach competitive pricing.

1. Pricing Your SaaS Platform More Expensively Than Competitors

Having a higher price than your competitors can help your SaaS platform stand out.

The primary reaction of customers to a higher price will be to ask what they're getting for their money.

Can you show added features or specific value metrics your SaaS platform has that can justify its price?

Consumer research can be critical to your success here. You don't need to develop features and value metrics in the dark. Take your existing platform, or that of a competitor, and ask people what else they'd like to see, and what features they'd pay extra to use.

If the average user of SaaS platforms in your niche is happy to pay an extra $200 per year for a specific feature, implement it and price your product accordingly!

By following a path where you are led by what consumers tell you, you avoid the risk of investing heavily in features that customers don’t want to pay more to use.

2. Pricing Your SaaS Platform Cheaper Than Competitors

Setting the price of your SaaS platform below that of your competitors might seem the best thing to do. If you offer an equivalent platform with similar value metrics, it's easy to convey that you provide something that's the same but less expensive.

The main risk attached to pricing below your competitors is that you don't know what their margins are. The price your competitors offer their SaaS platform for could be one that enables them to thrive and hit their internal targets. Will you be able to maintain a profit margin if you slash your prices to undercut them? Will you have enough funds to reinvest into the continued development of your product?

Undercutting your competitors might help you to attract customers in the short-term. However, you should consider whether longer-term it is a sustainable strategy for your business.

3. Using Equivalent Pricing to Your Competitors

Equivalent pricing is the most intriguing competitive pricing strategy. It is potentially the best one if you're able to get it right.

When you use equivalent pricing, you take the price debate off the table.

A customer's choice then comes down to which product is going to have the most significant and favorable influence on them.

The benefits are like if you follow a strategy of pricing more expensively than your competitors, you’re just removing the potential cost barrier!

 

What You Need to Consider When Using Competitive Pricing

As you can see, there is a lot that goes into a competitive pricing strategy.

While competitors are a central plank of your strategy, the best approach from a business standpoint is to allow what your customers, or customers in the marketplace want, to lead what you do.

This approach will allow you to make sound, evidence-based judgments on how you develop your product and how you position it in the market.

 

What Impact Can Price Changes Have on Your Business?

Price changes can have a significant impact on your revenue and profit, not to mention on the other metrics you might use to measure business performance.

Executing a fantastic competitive pricing strategy is always keeping abreast of what your competitors are doing. However, that doesn’t mean you should always react to a competitors’ price change as soon as you notice it. Moving the price up or down will impact your customers, and this should be the first thing you consider even before you look at what that means for your revenue.

 

Using Competitive Pricing in Your Business

If you plan to use competitive pricing in your business, ensure you have a plan that guides how you react to competitor changes. Your plan may depend on how a competitor's activity attracts customers away from your business. If you get lucky, you might even find competitors alienate their customers, and you get new subscribers without doing anything yourself!

Ensure you place most of your focus on your product and your customers. If you deliver value and inspire brand loyalty, you'll keep subscribers even if a competitor massively undercuts you. You will often find people very willing to accept price increases, too.

 

Author: Anne Egdal

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