Assessing the Advantages and Disadvantages of Competitive Pricing Strategy

Description: Competitive pricing allows a business to smoothly enter the market and confidently maintain its position for a long time. A thorough analysis of competitors' prices forms an objective vision of the market and helps to shape the pricing strategy of newcomers. However, this pricing model has certain drawbacks, which should be compensated for by other approaches.

Building consumer demand is one of the first and most important challenges companies face when entering the market. A significant factor in building a customer base is consumer-friendly pricing. But how do you know what price will be acceptable to consumers? One of the most effective solutions is to stick to competitive pricing. Find out how you can implement this strategy to make the most of its benefits and mitigate potential drawbacks. Based on this information, we will discuss whether this pricing model is suitable for SaaS Business.

4 Steps to Implementing a Competitive Pricing Strategy

1. Analyse your market niche. Collect data on direct and indirect competitors whose prices you will consider.
2. Analyse the prices of the products or services you are going to offer. Consider prices and whether their services/goods have more or less value for consumers than yours.
3. Determine your pricing position. If you are just entering the market, it makes sense to set prices slightly lower than your competitors. But if your products have more value, you can set higher prices to target consumers who prefer high-quality products.
4. Conduct regular monitoring. If your market niche is dynamic, conduct regular analysis of competitors' prices and adapt your prices to changing conditions.

Competitive Pricing Pitfalls You Should Avoid

• Superficial market research. You need to collect the most complete pool of your competitors. You should not draw conclusions based on the analysis of only the most visible market leaders.
• Ignoring differences in products or services. Your products/services are unlikely to be identical to those of competitors. Therefore, by setting the same price, you can either lose part of the profit or concede customers by overpricing. Therefore, be sure to take into account the difference in the value of your products for consumers.
• Rigidity. Prices are a variable, not a constant, since market conditions change under the influence of increased demand or supply. So, if you are not flexible in pricing, consumers will go to more adaptive competitors.

When to Revise Your Competitive Pricing Strategy

The market should be monitored on an ongoing basis to notice the entry of new competitors in time. And if these competitors have enough weight to upset the balance in the market, your prices should be revised. Adjust your pricing policy in the following cases:

• If competitors are changing their prices downwards or upwards;
• If new products/services appear that may undermine demand for your offerings;
• In case of changes in the legislative regulation of your market niche;
• If the overall economic situation is transforming.

Rules of Positioning in Competitor-Based Pricing

To determine a reasonable price for your goods or services, you need to build a price scale for relevant offers using competitive pricing tools. Arrange your competitors' prices in ascending order, taking into account the value of their offerings for consumers. Objectively evaluate the advantages of your offers in comparison with the goods or services of competitors. Based on this assessment, find a place for your products on this scale.

When grouping your competitors, consider both direct and indirect ones:

• Direct competitors claim the same market share as you, offering consumers similar goods and services.
• Indirect competitors offer goods/services that only partially coincide with yours. Therefore, they can attract an insignificant part of consumers but, in general, not claim the same market share.

3 Types of Market Positioning in Competitor-Based Pricing

Competitor prices are just a guideline to help you develop your pricing policy. You can take three basic positions relative to this waterline:

• Set prices higher than competitors: If your products/services are objectively better than those of competitors, set a higher price. This will signal to consumers that your offerings are more valuable and better meet their needs.
• Set the same price: This is a reasonable solution if you are entering the market with similar products and services and do not have your customer base willing to pay a higher price for them.
• Set a lower price: This approach is effective when entering the market, promoting the brand, and increasing sales. But you should not adopt it as a permanent solution, since consumers will perceive your offers as inferior products.

Why You Should Choose Competitor-Based Pricing

Competitive pricing is a simple and easy-to-implement strategy, but it is also effective:

• You know what to research and can obtain data from open sources.
• Making a decision based on competitor price analysis does not take much time.
• The probability of making a mistake in developing your pricing policy is excluded since you analyse a wide range of competitors.
• A competitive pricing strategy does not exclude the use of a hybrid strategy. You can also connect another pricing model, for example, a cost-plus or value-based. But at the same time, you will see how your price fits into the market landscape.

Disadvantages of Competitive Pricing Strategy That Can Affect Profits

• Your products or services may go unnoticed. If the market is oversaturated with similar offers, it is unreasonable to come out with the same price as others. In this case, your offers may be ignored.
• This strategy may lead to a misunderstanding of the laws of pricing. You see the prices of competitors, but you do not know why they are like that. Costs the competitors bear when producing their goods or providing services, as well as the profit they receive, remain in the shadows.
• You will always follow the competitors. If you do not develop your pricing strategy based on market demand and costs, you will always be forced to adapt to your competitors. They can spontaneously lower prices for many reasons, and you will have to do the same and lose your profit.

Final Thoughts on the Possibility of Using Competitive Pricing Strategy for SaaS Businesses

Considering the advantages and disadvantages of competitive pricing, we can come to the following conclusions:

• Such a strategy can help when entering the market, but in the long term, it can lead to a loss of profit.
• SaaS businesses should analyse competitors' prices to form an objective vision of the market situation.
• A competitive pricing strategy should be supplemented with other models. This will allow you to consider the value you offer to consumers, which may differ from what your competitors offer.