How to Create a Competitive Pricing Strategy That Works
One of the quickest ways to increase the value of your SaaS company isn’t to invest more in sales, marketing, or product. It actually has to do with overhauling your pricing strategy.
According to SaaS advisor Amanda Kleha and Openview Ventures, SaaS pricing requires regular, intentional attention. It’s not a one person job or a set-it-and-forget-it exercise. “It’s critical to the long-term health of your business to schedule quarterly meetings for you and your team to do a deep dive on pricing and packaging,” says Kleha.
Instead, if you want to capture the full value of your SaaS and generate more revenue, you need to implement a competitive pricing strategy that works.
Key components of a competitive pricing strategy
There are several factors that go into a competitive pricing strategy that actually works, including:
- Understanding what pricing options are available to you
- Understanding what your customers value
- Understanding your competitors’ pricing strategies
In short, research is the quickest way to find a pricing strategy that works for your business. We’ve compiled information on all three of these different pricing factors to help you get started.
Understanding different pricing models
Before you can implement a competitive pricing strategy of your own, you need to understand what options you have available. You can use this list of common pricing models to find the approach that best fits your market position and the objectives of your business.
- Flat-rate pricing: In a flat-rate pricing model, a business offers a single, consistent price for all users. This model is ideal for products that provide uniform value across multiple user segments.
Penetration pricing: Penetration pricing focuses on attracting new customers by offering a low introductory price. This strategy is particularly effective for gaining traction in competitive markets or when launching a new product.
Premium pricing: Premium pricing positions products at the higher end of the market. This model emphasizes value over cost and appeals to customers who are willing to pay a premium price for exceptional features or experiences. It’s especially effective for high-end brands or niche markets where differentiation is key.
- Dynamic pricing: With dynamic pricing, businesses adjust prices in real time based on factors like demand, competition, or market trends. This model is widely used in industries like eCommerce and travel, where fluctuating conditions can impact customer purchasing decisions.
- Value-based pricing: Value-based pricing prioritizes the perceived value of a product to the customer rather than focusing solely on costs.
- Price skimming: Price skimming is designed for innovative products, starting with a high price to target early adopters and gradually lowering it as the product matures. This model enables businesses to maximize initial revenue while adapting to changing market conditions over time.
Keeping your customers’ needs top of mind
Every successful pricing strategy begins with a deep understanding of your customer base and their willingness to pay (WTP). You can find your customers’ WTP by interviewing them or performing market research. By focusing on the perceived value of your product or service, you can create pricing that meets your customers’ expectations.
For starters, you’ll want to segment your customers based on how they perceive the value of your service. Factors like usage, budget constraints, and your customers’ business goals will all influence how your target market evaluates your offering. You can easily find this kind of pricing segmentation in any company that offers a tiered pricing model.
In the Zoom example below, you can see exactly how the video communications company segments its pricing largely based on how many users each of the target accounts needed.
Source: Zoom
How do you find your customers’ willingness to pay exactly?
There are several different methods you can use like conducting surveys or a competitive price analysis. But the easiest way would be to use a dedicated tool like Togai’s revenue simulator that uses your customers’ previous purchasing decisions and product usage to help you model out and understand the business impact for any pricing changes.
Source: Togai
Benchmarking your competitors’ pricing
What do you do if you don’t have any existing pricing data available to help you find the right price point for your service? Instead of relying on your intuition, we recommend analyzing your direct competitors’ pricing structures, promotional tactics, and market positioning via a competitor-based price analysis. This analysis of your competitive landscape can help you pinpoint where you should be setting prices based on your product differentiation versus competitors and what your ideal customers are currently paying for similar products.
Of course, if you’re willing to shell out some of your budget on software, you can also consider investing in a price intelligence tool to track industry trends for you. Just be sure that you’re not solely competing with your competitors on price. A direct price comparison like this can quickly become a race to the bottom and devalues your offering. So unless you want to undercut your competitors and compete on the lowest price, it’s best to avoid this strategy.
Why competitive pricing matters in SaaS and subscription businesses
When you take a look at where earlier-stage SaaS founders and business leaders spend most of their time, it often comes down to two activities:
- Handling the day-to-day operations: Sales, support, and building their teams
- Not running out of money: Fundraising and reducing burn wherever they can
But what founders so often miss is time spent refining their pricing strategy. That’s why, instead of treating pricing like a one-time exercise, SaaS and subscription business leaders need to see it as an ongoing process and a strategic growth lever for capturing market share, attracting new customers, and driving sustainable growth. Blue Ridge Partners even found companies that raised prices reported generating an average revenue increase of 7.6%, which is only half the industry best practice result of 15%+.
Source: Blue Ridge Partners
You should also keep in mind that a competitive pricing strategy not only helps you acquire new customers and generate more revenue but also positions your offering as a viable alternative to your competitors. Especially in a time when creating a SaaS company has never been easier, you need to ensure that you’re really nailing your pricing and positioning if you want to scale your business.
4 steps to create a competitive pricing strategy
Now, it’s time to take action. If you want to turn your pricing into a competitive advantage for your business, these are the steps you need to follow.
Step 1: Identify your unique value proposition
What makes your SaaS product worth paying for? Once you know the answer to that question, it’ll be much easier to set higher prices, attract price-sensitive customers, and compete against your competitors’ offerings.
To find your unique value proposition (UVP), start by identifying the features or benefits that distinguish your product. Whether it's a feature that’s built for a specific use case, a more intuitive UI, or superior customer support, differentiation is going to be the cornerstone of your UVP.
For example, the popular design company Canva’s UVP is that it makes design “accessible for everyone.” While most design tools have a steep learning curve and are built with professional designers in mind, Canva was built for the nondesigner. This focus on its UVP is what has allowed the company to charge a premium market price for service and grow at a staggering rate over the past decade.
Source: Mk's Guide
Step 2: Assess your costs and profit margins
We’ve only touched on the qualitative factors that impact pricing—what your competitors are doing and what differentiates your offering. Now we need to take a hard look at the numbers.
To make sure your product prices will help you turn a profit, you need to have a clear understanding of your financials, including all your operating expenses. Then, using a cost-plus pricing method, you can establish a base price for your service by adding a markup to your total costs. This method ensures that your business maintains healthy profit margins and eliminates the risk of unnecessary cash burn.
Of course, the exception here is that many fast-growing SaaS businesses are not actually profitable for long periods of time. However, if you want to set up a pricing strategy that actually turns a profit, then you need to follow this exercise.
Step 3: Implement flexible pricing models
If you take a look at any SaaS company pricing website, you’ll notice that they offer all different kinds of ways to pay, including setting multiple price points, tiered pricing, or upcharges for add-on features. When you implement flexible pricing like this, you can attract users from across your total addressable market (TAM) by giving them a pricing option that meets their specific needs.
But if you really want to gain a competitive advantage in your market, you should implement a flexible pricing model that’s built around customer value. This is typically referred to as value-based pricing or usage-based pricing.
The only problem is that it’s nearly impossible to price based on customer value unless you have a dedicated SaaS billing platform. However, with a billing platform like Togai, you can easily configure 100+ pricing strategies that are all based on your customers’ real-time product usage. You can even leverage Togai’s advanced rule and rating engine to package and bundle your product in completely unique ways, allowing you to monetize your SaaS as you see fit.
Want to start capturing the full value of your SaaS? Sign up for free to get started with Togai.
Source: An example of a self-service pricing plan set up within Togai
Step 4: Test, monitor, and refine your strategy
At this point, you’ve successfully analyzed your production costs, reviewed pricing examples of your competitors’ products, and made a final pricing decision. But as you may already well know, you’ll need to continually test, monitor, and refine your own pricing. In short, as long as the market is changing, so should your pricing.
The only thing to keep in mind is that making frequent pricing changes without a proper analysis can lead to destructive price wars within your company, erode your profit margins, and ultimately devalue your offering.
So how do you guarantee that you continually find the best price for your services?
You can continue to run ongoing tests and customer surveys, or, you can leverage your existing pricing data. And with tools like Togai’s usage and revenue analytics, you can use actual past data to understand how your revenue and your customers’ costs will be impacted if you plan to make a pricing decision.
FAQs
What is a competition-based pricing strategy?
A competition-based pricing strategy sets prices based on what competitors charge for similar products or services. Instead of focusing solely on costs or customer demand, this approach ensures your pricing remains competitive and aligned with market standards.
Why is competitive pricing a good strategy?
Competitive pricing is a good strategy because it helps businesses attract customers by aligning with market expectations while maintaining profitability. It also allows you to stand out in a crowded market by offering value relative to competitors.
What are the four types of pricing strategies?
The four main types of pricing strategies are:
- Cost-plus pricing: Adding a markup to production costs.
- Value-based pricing: Setting prices based on the perceived value to customers.
- Penetration pricing: Offering low prices initially to gain market share.
- Dynamic pricing: Adjusting prices in real-time based on market conditions and demand.
What is a perfect competition pricing strategy?
In a perfect competition pricing strategy, the market forces of supply and demand determine prices, with no single business having control over the pricing. Companies in this scenario must match the market price to remain competitive, as products are often indistinguishable from competitors.
