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Competitor-based pricing is a commonly used strategy for testing product pricing, particularly for newcomers to the market. It involves conducting comprehensive research on your competitors, their offerings, and the prices they charge, in order to develop your own pricing strategy.
When you're just starting out and don't have sufficient data from your own customer base, you can rely on the pricing data of more established competitors to guide your own pricing decisions as you navigate the market.
Competition-based pricing is a strategy that determines product and service prices based on competitors' prices. It doesn't consider factors like production costs, product value, or consumer demand. This method is commonly used in highly competitive markets with similar products. It's best for substitute products where brand doesn't matter much to customers.
Using competition-based pricing can be a good idea for SaaS businesses in early stages, when you don't have enough users to evaluate your pricing model. By using competitors' pricing as a reference, you can begin competing in the market with low risk.
After conducting extensive research on competitors' pricing, there are three methods to establish your own pricing strategy:
✅ Setting prices higher than competitors: This approach signifies that your product offers unique and valuable features and benefits not found elsewhere in the market.
✅ Setting prices lower than competitors: While this tactic can attract customers, it may also raise concerns about the quality and credibility of your product. Additionally, there are risks associated with lower profit margins and the ability to cover costs.
✅ Setting prices equal to competitors: If you choose to align your prices with those of your competitors, it is crucial to highlight the value of your product. This can be achieved through intensified marketing and branding efforts.
By carefully considering these pricing strategies, you can position your product effectively and maximize its potential in the market.
Advantages of Competition-Based Pricing
Consider implementing a competitive pricing strategy for your business. Before making a final decision, it's important to evaluate the benefits and costs. Here are some of the main advantages of adopting a competition-based pricing approach.
👍 Prices can change
When determining the price of your product based on competitor benchmarks, it's important to keep in mind that prices may fluctuate as your business expands and evolves.
Conducting competitive pricing analysis will provide you with valuable insights, enabling you to effectively compete with industry leaders. Additionally, utilizing price tracking software can streamline this analysis process.
👍 Execution is simple
Competition-based pricing is attractive because it is a relatively straightforward strategy. While it does require knowledge of competitors, extensive research and calculations are not necessary as with other pricing strategies.
Simply find out how much your competitors are charging and make pricing decisions accordingly.
👍 Can be used with other pricing strategies
Competition-based pricing solely focuses on the competition, disregarding consumer demand and production costs. However, it is often beneficial for businesses to employ multiple pricing strategies that take these factors into account.
For instance, a SaaS company can evaluate the cost of developing and marketing its software and utilize the cost-plus method to determine the selling price. Additionally, they can compare their prices with those of similar competitors in the market.
By employing a combination of pricing strategies, businesses can effectively stay ahead of the competition and efficiently cover their costs.
Drawbacks of Competition-Based Pricing
Competition-based pricing may not be advantageous for every business. Here are some drawbacks to consider:
👎 Consumer demand is ignored
Competition-based pricing assumes that competitors are setting prices intelligently and suggests that other market players should do the same. This strategy works well when only a few businesses implement it.
However, if a significant portion of the market adopts competition-based pricing, the market may lose touch with consumer demand. This occurs because prices either stay stagnant by following a primary competitor's lead or change sporadically as companies react to competitors pursuing the same pricing strategy.
👎 Flexibility is limited
Competition-based pricing is a strategy that focuses on competitors' prices. This approach assumes that factors like production value and cost structure are the same across all competitors. However, in reality, this is often not true.
Factors like higher fixed costs or unique product features require additional considerations to increase profitability. For example, if your product has exclusive features, setting identical prices to competitors might mean missed opportunities for higher returns.
👎 Consumers perceive you as ordinary
Consumers view your brand as ordinary because price is one of the first things they notice about your product. If you set your prices in line with the market average, you will be seen as just another SaaS offering similar solutions.
As a result, users will not have a reason to expect unique offerings from your brand.
👎 Long-run inefficiency
In the long run, various changes can occur that may prompt competitors to adjust their prices. These adjustments can stem from factors like differences in marketing strategy or an increase in product value.
However, incorporating these changes into your pricing without careful consideration may not be suitable for your SaaS.
Is Competition-Based Pricing Model Good For SaaS?
Competition-based pricing may initially seem appealing as it aligns with user expectations and provides a safe starting point for new businesses. However, relying solely on competitors' prices can overlook the true value of your product in the long run.
It's important to consider that there are instances when users may be willing to pay more or less for certain software. Additionally, as your business and competitors evolve over time, this pricing strategy may become ineffective.
While it's crucial to be aware of your competitors' features and pricing metrics, this knowledge can help you understand the market and identify opportunities to differentiate your product. Even if you opt for a different pricing strategy, competitors' prices will inevitably have some influence, as you cannot entirely ignore the market.
A more effective and profitable approach to pricing is value-based pricing. This method focuses on determining how much users are willing to pay based on the value your product provides. If your product delivers high value, you can consider raising prices. Implementing value-based pricing, however, requires thorough research and a deep understanding of your users.
Alternatively, you can combine competition-based pricing with other strategies. To identify the most suitable pricing strategy for your business, extensive research and testing are crucial.
Competition-Based Pricing: Real-World Examples
Competition-based pricing can be a game-changer in the competitive business world. Let's explore how some top brands have used this strategy for success.
Competition-based pricing is an essential strategy for retailers to establish product prices. Amazon, a prominent global online retailer, exemplifies the effectiveness of this approach. They consistently conduct extensive analyses of competitor pricing, aiming to provide the most competitive prices in the market. T
his strategic approach has enabled Amazon to maintain a strong competitive edge in the ever-evolving e-commerce industry.
Apple employs a distinctive pricing strategy that sets its prices higher than those of its competitors. Nevertheless, the company substantiates these premium prices through its exceptional branding, marketing, and messaging. This combination of competitive and premium pricing techniques enables Apple to uphold its elevated price points.
This serves as a testament to the fact that basing prices on competition does not always necessitate being the most affordable option.
The CRM software market, specifically the competition between Salesforce and Microsoft Dynamics, demonstrates a competition-based pricing method. These leading providers constantly monitor each other's pricing and frequently adjust their prices. This results in aggressive discounting and attractive promotional offers for customers.
Overall, it showcases a clear and ongoing rivalry, showcasing the practical application of pricing competition.
Web design businesses
Businesses looking to improve their online presence with a B2B website design have several options. Web design companies often perform pricing analyses by gathering quotes and comparing features and benefits.
This helps them set rates based on market trends. This method encourages product improvement, differentiation, and motivation for success.
How to implement a competition-based pricing strategy
To create a robust competition-based pricing strategy, thorough research is crucial.
By comprehending the pricing strategies of key competitors in your market and how those strategies influence customer expectations, you can establish appropriate rates for your new product or service.
1/ Identify your competitors
To implement competitor-based pricing, start by identifying your competitors. Determine which companies are offering similar products or services. This is a standard market research practice that you should already be conducting.
Next, categorize them based on specific characteristics like tenure and market share. Identify the companies that closely align with your own brand's profile. These companies are your top competitors.
2/ Research your competitors’ pricing and positioning
To gain a comprehensive understanding of your market, start by identifying your competitors. Afterward, conduct a competitive pricing analysis to examine their pricing models and positioning strategies.
This analysis will allow you to identify prevailing trends and gain insights into various aspects of their pricing, such as packaging, tiers, and key differentiating features.
By carrying out this research, you will be equipped to determine the optimal price for your product or service, aligning it with customer expectations in the market.
3/ Calculate an average of all competitors’ price
To gain a comprehensive understanding of the pricing landscape, it is crucial to analyze the individual pricing strategies of your competitors as well as the overall pricing data.
One way to achieve this broader perspective is by calculating the average price of products similar to yours across all competitors.
By knowing this benchmark price, you can effectively compare and evaluate your own product rates.
4/ Pick between higher, lower, and similar prices
Once you've done your research on competitors' pricing, it's time to determine where your product or service fits in the market. Here are some approaches to consider:
Higher-than-average price: Use a premium price to convey luxury to potential customers.
Lower-than-average price: Undercut the competition with a low price to attract customers quickly. This can include loss leaders.
Matched price: Align your pricing strategy with your competitors.
Keep in mind that the price you choose will indicate the customers' perceived value of your brand, whether you're entering the market or solidifying your position.
However, it's important to note that competitor-based pricing, like other simple pricing methods, may not optimize your company for growth.
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Demand-based pricing is a strategic approach that involves setting the price of a product or service based on consumer demand. The objective is to maximize sales and profits by charging customers an amount they are willing to pay.
Skimming is a pricing strategy where you initially set your SaaS prices higher than usual, then gradually lower them over time. The idea is to attract a smaller target market first and generate initial revenue.
Captive pricing, also known as captive product pricing, is a pricing strategy where a "core" product is offered at a lower price, but additional products required to fully use the core product are charged separately.