What is competitor-based pricing, and how to use it wisely?

Have you heard about the Second Cheapest Wine?

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It’s a wine that you buy in a restaurant when you don’t want to drain your wallet too much, nor come out as a penny pincher. You intensively scan the menu, desperately look towards the bottom of the list, and voila! The Second Cheapest Wine comes to the rescue.

As long as the strategy to go for the affordable but not the cheapest might turn out just fine at dinner, it doesn’t necessarily apply to business, and the software industry is not an exception.

I bring the wine example because SaaS companies tend to use a similar strategy to their pricing. It’s called competitor-based pricing, and I will break down the pros of doing it right and the cons of doing it wrong.

In this article, you will learn:

• What is competitor-based pricing;
• What is the cost of following it blindly;
• What are the advantages of it.
  

What is a competitive pricing strategy, and why do companies go for it?

Competition-based pricing is a way of positioning your product’s pricing model based on how your competitors do it. You check a dozen similar tools, compare their prices, and develop your pricing strategy accordingly.

Usually, somewhere at the bottom - to compete with the price but not to be the cheapest. We know that from the interviews we have conducted with founders and CEOs, they’re usually pricing at lower quartiles of the pricing corridor if they apply the benchmarking strategy.

It doesn’t include just the price. You can copy the number of plans, discount policy, or whether you charge per seat, per feature, or if you charge at all.

SaaS companies love it because it’s easy to do and requires relatively low effort. And as long as easy and effortless solutions don’t have to be wrong, competitor-based pricing, if done thoughtlessly, may lead to many business risks.

If done correctly, it will be a great source of clutch business insights about your competition and customers.

Advantage of competitor-based pricing

You get information on the market

If your company is capable of conducting a competitive pricing analysis once in a while, then you’re up to date with your competitors’ pricing strategies. And this means you get the most potent resource there is - information.

You can understand the average price levels or define the most common value metric of the products. You establish a clear understanding of your advantages and disadvantages towards competitors and their selling points. You get to know if other businesses change their pricing strategies and in what way.

You know what you don’t know, and you know what you do know. Based on this knowledge, you can position your pricing strategies precisely and sell more to your target customers.

To give you an example, we have conducted such analysis for one client. It clearly shows that three-tiered packaging is the most popular on the market. The median price corridor is between $14-$20, so it already tells us if we’re shooting too high or too low. Interestingly, we can also identify if the freemium acquisition model is in place or not.

It’s improving your team’s research capability

Scanning your business environment forces you to create a specific culture of market research in the company. With the help of tools like G2, Capterra, Hexowatch, or Alexa, you can easily create, what I like to call, an insights factory.

And it doesn’t have to be limited to just the pricing. The longer and deeper the research goes, the more variables you can add: marketing activities, new clients, acquired, job changes, new investments. All combined can give you a great market vision, which translates to more conscious business decisions.

It’s easy

As much as it does take the knowledge to do it properly, in general, it still is relatively easy. Once you establish a transparent methodology, all you need is a researcher and a repeatable process.

It also means that you can easily outsource it. Way easier than, let’s say, value-based pricing, which requires deep knowledge of your and your competitors’ features and their value on the market.

Disadvantages of competition-based pricing

Your business loses identity

Let’s say that you’re building your SaaS from scratch. You have a problem to solve, a niche to nail, and, eventually, a marketing and product strategy to execute. You probably wouldn’t like to outsource any of those to your competition because they are yours. These components define who you are as a company.

In the same way, you shouldn’t outsource the pricing because if you do so, you openly agree that others have a pricing strategy, and you don’t. Or to put it differently: others charge for who they are and what value they bring to the world, and you don’t.

What you can do, though, is to ensure that you consciously take others under consideration but try to carve out a niche only for your product. There is no fault in knowing how much others are charging or which features or value metrics they own. What you should do is not to follow blindly but use the data to identify differentiating chances.

For instance, just because most of the market goes with Good-Better-Best packaging doesn’t necessarily mean you need to do the same. Basecamp is one of the world’s best tools, and they do it with a very conscious all-in-one packaging strategy.

Knowledge is power. Following it blindly is a weakness.

It’s easy to fall for false positives

It’s very tempting to assume that tools are similar, especially if their key features serve the same purpose. The reality, however, is that they rarely are. Depending on variables, such as scalability, the number of features, or market penetration, the software is aimed at various clients, thus being priced differently.

Let’s take document signing tools as an example. You wouldn’t expect many differences among these; at the end of the day, they’re supposed to help you sign documents remotely.

And yet, DocuSign offers a wide array of integrations, so it’s a perfect choice for large-scale enterprises. HelloSign doesn’t have as many integrations, but it’s simple and straightforward, so their target audience is SMB’s. PandaDoc, on the other hand, offers over 400 business document templates, which saves companies time on accountancy and law enforcement.

Comparing their pricing directly will lead to wrong assumptions and, by any means, won’t allow you to precisely adjust your pricing strategy to your tool’s value and position on the market.

Price Intelligently did a great pricing teardown between DocuSign and PandaDoc. Here you can see that because these, similar as it might seem, tools have different product strategies, their customers' Willingness to Pay is different, and so are their pricing strategies.

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You risk a poor time investment

Competition-based pricing, if done right, takes from 20 to 30 hours of well-aimed market research. It requires proper methodology, benchmarking, and unit value and economics conversion. And a whole lot of well-organized spreadsheets.

If you can’t develop a good logic for the price research, then there are big chances that the results won’t be relevant. And, worst-case scenario, you will aggregate data in a way that wouldn’t allow you to make any use of them in future comparisons.

When is it a good time to compare my pricing strategies to competitors?

The answer is simple: always. It is never the wrong time to be up to date with what’s happening on the market, no matter if you’re an early-stage startup or a fully grown SaaS with millions of users.

Just keep in mind that competitive pricing is a double-edged sword and, if done thoughtlessly, may lead you to deadly wrong assumptions. Think of it as an element of your pricing strategy and a great source of information, not as a direct tool to translate your product’s value.