Competitive pricing
SaaS Providers

Competitive pricing strategy – what is it and its advantages and disadvantages

4 Mins read

Product or service pricing is an important aspect of any business and setting the right price for your products or services is essential to the success of your business. Many businesses use a competitive pricing strategy, which involves comparing your prices to those of your competitors. This can be a very effective way to attract customers, but it also has some disadvantages.  

In this blog post, we’ll discuss the advantages and disadvantages of using a competitive pricing strategy. We’ll also help you decide if this type of pricing is right for your business. 

What is a competitive pricing strategy? 

Competitive pricing is the process of selecting price points for your products or services based on what your competitors are doing. This is a good way to test how much people will be willing to pay for your product. You need to research what your competitors are doing and how much they are charging, to come up with a price that is fair for both you and your customers. If you’re just starting, you might not have enough information about what people are willing to pay. In this case, you can use data from other businesses that have been in the market for a while. 

How to set a price based on a competitive pricing strategy? 

To figure out how much your product should cost, you need to compare it to similar products. you need to group your competitors and see where your product and brand fit in the range between them.  

In a competitive pricing strategy, you must be aware of your direct and indirect competitors. Directly competing products offer similar services for one specific market share; whereas Indirect competitors overlap with yours but in different ways. They may only have features that are very similar to yours or they might provide an entirely new product line that does not directly compete with your company’s offerings (but could still affect revenues). 

There are three ways how you can price your product after doing a thorough analysis of competitors. You can price your product at a rate above or below your competitors or you can also price your product at the same price as your competitors. 

  • If you think your products or services are better than your competitors, you might want to price them higher than they are. 
  • If you price your product the same as your competitor, you need to focus on the added value your product can offer. Even though your product and its features are the same as your competitor’s, emphasizing the added value will make people more likely to buy from you. 
  • Pricing your product lower than your competition usually isn’t a good idea. However, you can do this if you want to attract more customers and increase sales, but make sure that your product is still good quality. 

Pros and cons of the competitive pricing model 

Competitive pricing can be an effective strategy for businesses that want to stay competitive in their industries. There are, however, some major drawbacks and benefits associated with this model so make sure you do your research before adopting one! 

 Advantages of competitive pricing 

  • Easy to implement – A competitor-based pricing model is easy to implement. You just need to do some basic research about your competition and find out how they have priced their products. 
  • Less chances of failure – By deciding your prices based on the prices of well-known competitors, there are very less chances that your pricing strategy will go wrong. 
  • Can be used with other pricing strategies – There are two ways to price your products: value-based pricing and cost-plus pricing. You should use both of these methods to come up with a final price, and then compare yourself to your competitors. If you are priced too high or low, adjust your price until you are in line with what the competition is offering. This will help you stay competitive and cover your costs. 

Disadvantages of competitive pricing 

  • Not for the long term – If you are entering a new market, it can be helpful to use a competitor-based pricing model. However, as you progress in the market, your competitors may change their prices based on changes in their marketing strategies. 
  • Chances of copying competitor errors – If you use a competitor-based pricing model, you’ll miss out on some of the details your competitors have. If they make a mistake, you’ll make the same mistake, and it could hurt your profits and revenues in the future. 
  • Unable to create differentiation – When you use the same pricing strategy as all your competitors, you will not be seen as different. You will blend in with all the other brands that offer the same products and services. This will make it difficult for your customers to understand why your product is priced in this way. 

A competitive pricing model for SaaS 

Charging the right price for your Software as a Service (SaaS) product is important. If you charge too little, you might not be able to cover your costs. But if you charge too much, customers might stop subscribing. You need to find a balance that provides value to the customers and gives your company a competitive edge. 

Competitor-based pricing might not be the best pricing model for SaaS businesses. It can be used in combination with another pricing model, but it should not be used as the only pricing metric. There are several problems with competitor-based pricing for SaaS.  

First, your price is based on your competitors’ prices, which may not be a good measure of the value you provide to your customers.  

Second, using competitor-based pricing can diminish the value of your product in the eyes of the customers. If you are not seen as being worth the price, your customer might choose a competitor’s product that is similar in price. You will also not have any idea of why a particular set of features is being offered at a particular price. When you only use competition-based pricing, it is similar to copying what the competition does and will only help you stay in the market for a short time. 

Not using your own strategy to set prices can be risky. Companies come out with new software to be the best in the market and be more valuable than competitors’ offerings. If you use them as your benchmark, you may be selling yourself short.  

Wrapping up 

In some businesses like E-Commerce, it is important to have a competitive price. But in other businesses, like SaaS, you should not just look at your competitors’ prices. You also need to think about how much value your product offers and how much it can do. When you use competitor pricing in combination with other pricing models, it can be of much help. 

RackNap, as a subscription business billing and management software, can help you automate various aspects of your subscription business. Learn how you can optimize your business processes via automation and deliver a better customer experience and build a strong customer base for higher revenues. Book a demo today.

Also read: Is automation a boon or a bane for Service Providers?

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