Picking the right SaaS pricing strategy is vital for generating growth and revenue. Even if your product is perfect, the wrong financing model can cause your business to slow down. Your pricing strategy should positively impact your bottom line, revenue, and customer perception.
If you are a new player looking to break into a saturated market, market-based pricing could be the right choice for your business. Market-based pricing is a strategy where your offering price is based on factors such as:
- Customer demand
- Competition
- Market environment
To set the price of a product or service, some companies use market-based pricing based on what their customers are willing to pay and what their competitors charge for similar products or services. With market-based pricing, a company cannot control how their potential customers evaluate them against the competition.
Is Market-Based Pricing Ideal for All Businesses?
Of course, market-based pricing is ideal for all types and sizes of businesses. However, it must be implemented with solid strategies.
Done well, market-based pricing can help find the optimal balance between pricing and product value, eventually leading to bigger market shares and competitive price levels.
Ideally, every business should adopt strategic market-based pricing as it determines how products and services are priced. In fact, this pricing strategy is commonly used in restaurants, car dealerships, retail stores, and cell phone companies.
How is Market-Based Pricing Calculated?
As the name suggests, the most obvious parameter to set market-based pricing is to notice the current market and evaluate your position compared to your competitors.
Here’s a simple formula to calculate market-based pricing:
Product cost + Market pricing + Premium = Market-based pricing
The trick is understanding the trending prices and leveraging the average as your own pricing. Additionally, adapting to the market fluctuations is important to keep the pricing relevant.
What Are the Factors to Consider For Market-Based Pricing?
In the SaaS industry, providers determine pricing based on market factors, such as:
Market demand
Analyzing demand trends is a helpful way to determine what prices customers are willing to pay. This involves offering tiered pricing plans or different pricing models based on the specific needs and preferences of various customer segments.
Your customer feedback
If you are in the SaaS business, it is important to gather customer feedback, particularly because SaaS providers use market-based pricing to determine service costs. You should also consider what customers think about your product’s functionality, features, advantages, and quality. Using this information will help you set a price that reflects these values.
Your competitor pricing
Using competitive pricing as a parameter helps attract more customers and remain steadily competitive in the long run.
Differentiation based on value.
Value-based differentiation offers different options, such as additional features, functionality, or service levels at higher prices. This pricing strategy helps differentiate your services based on the value they provide to customers.
What Are the Benefits & Drawbacks of Market-Based Pricing?
Benefits
Market-based pricing is purely based on the market conditions and your competitors’ prices, leaving barely any role for the customer whatsoever. This pricing strategy is beneficial in terms of:
- Leveraging market competitiveness to increase your market share.
- Better customer to your prices since it is market-based.
- Better flexibility and relevance to adjust product prices.
Drawbacks
Market-based pricing may pose these challenges:
- When the pricing of products or services becomes competitive, it can result in a decrease in profit margins.
- Heavy dependence on market trends may not be as proactive or help you stay ahead of the curve. Rather, you may end up following what others are doing and miss profitable opportunities.
- By basing your pricing on the market conditions, you may be undervaluing or overpricing your products, hurting your sales.
A market-based pricing strategy requires a lot of work and careful consideration of the important factors to make it a dynamic and interactive process.
