.png)
Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
In the dynamic world of software as a service (SaaS), pricing is not just a number—it's a strategic decision that impacts acquisition, retention, and overall business growth. While many companies default to competitor-based pricing as a seemingly safe approach, SaaS businesses often require more nuanced pricing strategies. This article explores the fundamental differences between SaaS pricing models and competitor-based pricing, helping executives make informed decisions that drive sustainable growth.
Understanding Competitor-Based Pricing
Competitor-based pricing is exactly what it sounds like: setting your prices primarily based on what your competitors charge. This approach is common across many industries and follows a straightforward logic:
- Research what competitors charge for similar products or services
- Position your pricing slightly above, below, or at parity with competitors
- Adjust based on perceived quality differences or market positioning
While this approach seems practical and risk-averse, it comes with significant limitations—especially for SaaS companies operating in rapidly evolving markets.
The SaaS Pricing Difference
SaaS pricing operates under fundamentally different principles than traditional competitor-based approaches. Here's why:
Value Creation vs. Market Conformity
SaaS pricing models typically focus on the value delivered to customers rather than merely matching competitors. According to a study by Price Intelligently, value-based pricing can increase a SaaS company's revenue by 30% or more compared to competitor-based pricing.
Value-based pricing requires a deep understanding of:
- What problems your software solves
- How much these solutions are worth to customers
- Which features create the most significant impact
Subscription Billing Flexibility
Unlike one-time purchase products where competitor price matching is common, SaaS employs subscription billing models that provide unique flexibility:
- Monthly vs. Annual Plans: Offering discounts for annual commitments improves cash flow and reduces churn
- Custom Enterprise Pricing: Tailoring pricing for larger clients based on specific needs
- Expansion Revenue Potential: The ability to grow revenue from existing customers through upgrades
Research from Zuora indicates that companies embracing flexible subscription billing models grow revenue 5 times faster than S&P 500 companies.
Popular SaaS Pricing Models
SaaS companies can choose from several pricing models, each with distinct advantages over simple competitor-based pricing:
Tiered Pricing
Tiered pricing offers different feature packages at various price points. According to Price Intelligently, 38% of SaaS companies use this model because it:
- Appeals to different market segments
- Creates natural upgrade paths
- Allows for strategic feature bundling
For example, Salesforce offers various tiers from basic to unlimited, catering to businesses of all sizes with appropriate feature sets.
Usage-Based Pricing
This model charges customers based on their actual consumption of the service. AWS, Twilio, and Stripe have popularized this approach which:
- Aligns costs directly with value received
- Reduces barriers to entry for new customers
- Scales naturally with customer growth
OpenView Partners' 2022 SaaS Benchmarks Report found that companies with usage-based pricing models achieved 38% higher revenue growth compared to those without.
Freemium
The freemium model offers basic features for free while charging for premium features:
- Accelerates user acquisition
- Creates a natural conversion funnel
- Drives product-led growth
Slack, Dropbox, and Zoom have successfully used freemium to achieve rapid market penetration. According to Profitwell, freemium models can reduce customer acquisition costs by up to 60% compared to traditional sales models.
Free Trial
A time-limited free trial provides full access to software before purchase:
- Demonstrates full product value
- Creates urgency through the trial deadline
- Generates qualified leads
HubSpot found that 44% of SaaS companies offer a free trial because it significantly increases conversion rates compared to demo-only approaches.
Impact on Customer Lifetime Value
Perhaps the most significant difference between SaaS pricing and competitor-based pricing is the focus on customer lifetime value (CLV).
SaaS companies must consider:
- Acquisition Cost Recovery: How long it takes to recoup customer acquisition costs
- Churn Reduction: How pricing affects retention rates
- Expansion Revenue: Opportunities for upselling and cross-selling
Research by Bain & Company shows that increasing customer retention rates by just 5% can increase profits by 25% to 95%. This long-term perspective is often absent in competitor-based pricing strategies.
Pricing Strategy Best Practices for SaaS
When developing your SaaS pricing strategy, consider these best practices that go beyond competitor analysis:
1. Start with Customer Research
Before setting prices, conduct thorough research to understand:
- What features customers value most
- Their willingness to pay for specific benefits
- How they perceive competing solutions
2. Develop Clear Product Positioning
Your pricing should reflect your positioning in the market:
- Premium products command premium prices
- Value players emphasize affordability
- Specialized solutions target specific use cases with appropriate pricing
3. Package Thoughtfully
Feature-based pricing requires strategic packaging:
- Include must-have features in all tiers
- Reserve high-value features for higher tiers
- Create logical upgrade paths
4. Align Sales Compensation with Pricing Strategy
Ensure your sales compensation structure supports your pricing model:
- Incentivize annual contracts if reducing churn is a priority
- Reward expansion revenue if growth from existing customers is key
- Balance new customer acquisition with retention based on business goals
When Competitor-Based Pricing Makes Sense for SaaS
Despite its limitations, competitor-based pricing can be useful in certain SaaS contexts:
- Market Entry: When entering established markets, pricing relative to competitors can help position your solution
- Commoditized Features: For features that have become standardized across the industry
- Benchmark Starting Point: As an initial reference point before implementing more sophisticated pricing models
Conclusion: Beyond Competitor Pricing
While competitor-based pricing offers simplicity and market alignment, successful SaaS companies typically evolve toward more sophisticated pricing models that reflect the value they deliver and the unique characteristics of subscription businesses.
The most effective SaaS pricing strategies combine elements of multiple approaches:
- Understanding competitive landscape (competitor-based)
- Capturing fair value for solutions provided (value-based)
- Aligning with how customers use the product (usage-based)
- Creating appropriate tiers for different market segments (tiered pricing)
By moving beyond simple competitor price matching to a comprehensive pricing strategy, SaaS companies can increase acquisition, improve retention, and maximize customer lifetime value—the true measure of SaaS business success.
Remember that pricing is never set in stone. The most successful SaaS companies continuously test and refine their pricing strategies as they learn more about their customers and as their products evolve.