There are dozens of different ways that SaaS businesses can anchor their pricing, but many choose to base their pricing on the value their business provides—also known as value-based pricing. The problem here is that a service’s “value” is relative to how severe a customer’s pains are.
For some SaaS companies, the best way to start anchoring prices is to look at their competitors and base them on that. This approach is commonly referred to as competition-based pricing. Throughout this article, we’ll explain everything you need to know about this pricing strategy, including how you can implement it in your SaaS business.
What is competition-based pricing?
The average SaaS buyer has several software subscription options to choose from, depending on the tool they’re looking for. As the SaaS marketplace continues to grow with the influx of new tools, it only makes sense that many companies use competitor prices as an anchor when initially setting or adjusting their pricing.
Competition-based pricing sets prices based on competitor prices rather than a company’s own production costs or customer-perceived value. Ultimately, the goal of competition-based pricing is to ensure that a company’s pricing matches its customers’ expectations.
Let’s look at a SaaS company that offers email marketing software as an example. If the company’s competitors charge $50 per month for similar features, the company might set its price at $40 per month to attract price-sensitive customers. By undercutting its competitors, this company now has the opportunity to:
- Attract new users who want a budget-friendly option
- Differentiate itself in its SaaS vertical
- Increase prices later on once it has established itself as a trusted solution
These are all great opportunities, but there’s one big issue. Following a competition-based pricing model could quickly become a race to the bottom on price unless your product is clearly differentiated in the marketplace.
The best way to avoid this is to benchmark your competitor rates to remain cost-competitive while highlighting your own product’s unique features, integrations, or use cases. Not only will this allow you to continue benchmarking your pricing based on similar competitors, but it will also ensure that prospects understand what sets your SaaS apart from other competitors in your space.
How is competition-based pricing different from cost-based and value-based pricing?
There are plenty of other ways to price your SaaS product, and many SaaS companies choose to price their services based on their operating costs or the value they deliver to their customers.
Cost-based pricing: With this pricing method, companies factor in their production costs and then add a desired profit margin to set the price. This approach allows for a stable, consistent pricing strategy based on internal cost structures rather than reacting to the external market.
Value-based pricing: This pricing model involves understanding how much value customers perceive in a product. Companies using value-based pricing can potentially justify setting prices higher depending on the unique benefits and value their product offers.
The key difference with competition-based pricing is the emphasis on competitor prices over internal costs or customer perceptions of value when setting a price. While cost- and value-based pricing may allow some wiggle room, competition-based pricing anchors directly to competitor price points and is a highly market-driven approach.
What are the different types of competition-based pricing?
There are a few different approaches to consider when adopting a competition-based pricing strategy.
Price matching: With price matching, businesses directly benchmark competitor prices and set the same price for their own offering. This head-to-head price parity can help convince price-sensitive shoppers to become customers.
This is a great option for SaaS companies offering a unique user experience, set of features, or integrations that their ideal customers are looking for. However, this approach also limits pricing flexibility and can make it difficult to adjust pricing later on.
Undercutting competitors: Not keen on copying your competitors? Some companies opt for a low-cost approach by pricing slightly below competitor rates. This penetration pricing attracts bargain seekers.
However, it’s important to remember that drastically undercutting market prices can trigger a pricing war and potentially harm a company’s profit margins. If you plan on positioning yourself based on value, it’s best to avoid this approach.
Premium pricing: Some businesses might set prices higher than competitors and justify this premium pricing with concrete product differentiation and added value. If extra features, exceptional quality, or superb customer service set a product apart, a business can command a higher price point.
The only caveat with this pricing approach is that the added premium must align directly with the additional value the product creates. If the value isn’t clear, customers will likely opt for a lower-priced alternative.
When should companies use competition-based pricing?
Just because you can adjust your pricing based on your competitors doesn’t mean you should.
Certain contexts lend themselves particularly well to a competition-based pricing strategy, but this isn’t the best option for all SaaS businesses. Without a clear product-market fit, anchoring your pricing based on your competitors could result in potential buyers viewing your SaaS as a commodity rather than a valuable tool worth investing in.
As long as you’ve done your due diligence in terms of market research, competition-based pricing is a great place to start anchoring your prices. This strategy often makes sense when trying to stand out in the market or when starting a new SaaS business.
To stand out in highly competitive markets
In crowded markets saturated with many similar products, competition-based pricing can help companies avoid being priced out while defending their current market share. This is especially true in highly competitive markets where differentiation amongst competitors is minimal. The project management space is a perfect example of this. While many of these tools offer the same functionality, the reason customers choose one tool over another often comes down to UI, UX, integrations, and pricing.
Google's customer insights even show that half of all customers compare rates and buy based on price—and this is just for retail consumers. In a B2B SaaS context, you can be certain that your ideal users will be checking out several of your competitor’s pricing.
When starting a new business
Software startups and other new businesses may consider leveraging competition-based pricing when establishing pricing for an unproven product. Rather than guessing at their ideal pricing, a new company can use competitor prices as a baseline. This can also keep a new SaaS business from alienating potential customers because of high rates—especially before the business has a clear idea of what specific product lines or features its core user base values most.
Once the company has proven its product’s value to new customers, the company can introduce more complex pricing models like usage-based pricing. When shifting pricing strategies, a company can then monetize its user base based on hundreds of different pricing configurations with dedicated usage-based pricing tools like Togai.
When is competition-based pricing the wrong approach?
While competition-based pricing is a good fit for many SaaS contexts, there are plenty of situations where your best bet is to set your pricing based on something like high customer usage or value created over time. Here are just a few examples of when competition-based pricing isn’t the right approach for a SaaS business.
You have a highly differentiated product
SaaS tools with truly unique features or value propositions deserve pricing structures that align with their perceived product value rather than strictly following the market. If your company’s unmatched unique selling propositions (USPs) set it apart, going with competition-based pricing may leave profits on the table.
You’re prioritizing long-term customer value
Products emphasizing loyalty, retention, premium features, or standout UX are usually a better fit for value-based pricing models. Unlike competition-based pricing, value-based pricing accounts for customer lifetime value and ability to pay. This is critical for SaaS companies playing the long game.
For example, it wouldn’t make sense for Slack to price based on its competitors because its usage-based pricing model is designed to offer long-term value to its users.
You want to avoid pricing wars with competitors
Obsessively benchmarking your rivals could force prices down over time, especially when multiple players in your industry or vertical begin to undercut each other. In extreme cases, a race to the pricing bottom via penetration pricing could seriously hurt your margins. It could also diminish the market’s perception of your product or service quality.
Benefits of competition-based pricing for SaaS companies
While it may not be the perfect choice for every company, charging based on competitor prices does offer a few key advantages for SaaS businesses.
Appeals to price-sensitive users
For starters, matching your competitor's price points attracts price-sensitive users who are performing online price comparisons. This kind of competitive pricing enables faster customer acquisition, allowing you to grow your customer base rapidly.
Proven to work
Getting your pricing and packaging wrong can result in some pretty severe consequences if you’re not careful. If you undercharge, you’ll be severely undervaluing your SaaS. This could then make it more difficult to justify future price increases. On the other hand, if you overvalue your product or service, it’ll be difficult to attract and retain customers who aren’t getting a fair ROI from your SaaS.
Competition-based pricing allows you to adjust your rates to the market by benchmarking other competitor pricing examples and using them as a proven starting off point.
Easy to implement
It’s also worth noting that a competition-based pricing strategy is incredibly easy to implement. Comparing functionalities and matching competitor prices is much more straightforward than conducting extensive customer value analysis. If you're a new business that needs to quickly anchor your prices, charging based on competitor prices may be the easiest way to start.
Examples of competition-based pricing
Competition-based pricing may be simple, but it works so well that many Fortune 500 companies incorporate it into their pricing strategies.
CRM software providers: Pricing wars in action
The Customer Relationship Management (CRM) software market, particularly the relationship between leading providers Salesforce and Microsoft Dynamics, serves as a prime example of a competition-based pricing method in action. In an attempt to maintain market dominance, these companies continuously monitor each other's pricing structures. The result is a frequent reshuffling of prices, often leading to aggressive discounting and enticing promotional offers for their customers.
Collaboration tools market: Adjusting to the rivals
If you’ve spent any amount of time working online, you might have experienced the competition in the collaboration tools market firsthand. Slack was once the undisputed leader in this market, but it found it needed to reevaluate its pricing strategy in the face of fierce competition from Microsoft Teams.
Also Read: Competitive Pricing Strategy- All You Need to Know
Microsoft Teams not only offered similar functionality but also provided its services at lower prices or as part of bundles with other Microsoft products. Today, neither of these platforms has managed to trump the other. Instead, workers in the Apple tech ecosystem usually opt for Slack, while those who are already embedded in the Microsoft suite of tools typically end up using Microsoft Teams by default.
Web design companies: Balancing value and affordability
There are many options for businesses seeking to enhance their online presence with a B2B website design. Web design companies often perform a competition-based pricing analysis by gathering a range of quotes and comparing the additional features and benefits of each service offering. This makes it possible for them to align their prices with market trends.
Cloud Storage: Dropbox vs. Google Drive
In the cloud storage space, Dropbox was an early leader, but it faced intense competition from Google Drive. Google Drive offered more storage space for free and introduced pricing models that undercut Dropbox’s premium services. In response, Dropbox had to adjust its pricing structure, offering more competitive rates and additional features to stay relevant. This competition has led both companies to continuously refine their offerings and pricing to appeal to individual and business customers.
How to set up a competition-based pricing strategy
Pricing can quickly become one of the most powerful growth levers for a SaaS business, but this is only if you have a clear process in place for setting your initial strategy. Here are the steps you can take to set up your competition-based pricing strategy.
Step 1: Conduct market research
Thoroughly research your competitors’ pricing models and the pricing data that influences them. While it’s not always easy to track down competitor prices—especially if they’re not publicly available—here are a few places you can start:
- You can make a list of the 5–10 biggest competitors in your industry and manually visit each website to see how their pricing breaks down across individual subscription tiers. Once you’ve collected all of this data, you can calculate the average price to act as your baseline.
- The venture capital firm OpenView regularly releases research reports breaking down pricing models, including insights into average prices for various SaaS solutions across different industries. These reports can give you a rough idea of what similar companies in your space are charging.
- You can search software review platforms like G2 and Capterra for information on software pricing in specific industries and verticals. But even if you can’t find direct information about your competitors’ pricing, the reviews on these sites often contain insights into how customers feel about how much they’re paying for these tools compared to how much they’re paying.
- The tool Baremetrics can track competitors' pricing strategies. You can also use it to determine why certain features are priced higher (e.g., more complex features, API access, or enterprise-level security).
Once you’ve compiled your price intelligence, your team will have insights into what drives your competitors’ decision-making around their pricing levels and messaging. For instance, you may learn that your competitors all offer freemium plans or prices based on usage. Whatever you learn, you can use these insights to set your initial pricing plan.
Step 2: Benchmark and set prices
Compare your SaaS tool’s functionality, user experience, support services, and overall value against the market pricing examples of your competitors. It’s easiest to choose the competitor most similar to your business and set your base rate slightly above or below theirs. It doesn’t get much more straightforward than this.
However, if you don’t want to make these comparisons from scratch, you can easily find premade competitor comparison templates within free tools like Google Sheets, Coda, or Notion. If you want a paid option, you can use dedicated competitive analysis tools like Crayon or Kompyte to automatically track and update competitor feature sets, making your pricing and feature research easier.
Step 3: Monitor and adjust prices
Many SaaS businesses adjust their prices to reflect the added value of their product or to adapt to rising operating expenses. This means you’ll also need to continuously monitor your competitors’ pricing movements to make sure you’re not pricing yourself too far above or below the market rate. You can either choose to monitor your competitors’ prices manually on a quarterly basis, or you can invest in the competitive analysis tools we mentioned earlier (Crayon and Kompyte) to track these pricing movements in real time.
But if all else fails and you aren’t equipped with the tools or the time to monitor your SaaS’s competitive landscape, aim to revise your pricing twice a year.
Design and launch your pricing strategy with Togai
Whether you’re charging based on your competitor’s prices, your USP, or customer usage, you need the right tools to put your pricing strategy into action. However, you don’t need to spend ridiculous amounts of time or developer resources trying to build your own in-house billing engine.
That’s why we created Togai. Togai enables you to configure 100+ monetization strategies with zero code, providing support for self-serve and custom enterprise contracts in a single system.
Ready to bring your pricing strategy to life? Schedule a meeting with our team to get started.
