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Estd 4.22.2023
Just as tariffs between major trading partners (like U.S. import taxes on Chinese goods) alter trade flows and squeeze margins, price wars in software can similarly distort market dynamics. Tariffs raise costs and force exporters to cut prices or absorb costs. In the 2018-2019 U.S., China trade war, many manufacturers saw higher input costs and “lower profit margins” as a result. Likewise, when software companies undercut each other’s prices or bundle services for free, it creates ripple effects: margin compression, commoditization of offerings, and even market restructuring. In essence, a price war is the tech industry’s version of a trade tariff, an economic shock that forces everyone to adapt.
The Ripple Effects of Price Wars: Tech’s Tariff Moment
When one player slashes prices or adds a product “free” (similar to a tariff altering a trade’s cost basis), competitors often retaliate. The short-term beneficiary is usually the customer (lower prices), but the long-term effects can be complex:
- Margin Compression: Just as tariffs squeezed business profits in trade, aggressive price cuts forced software providers to operate on thinner margins.
- Commoditization: If every competitor offers a similar service at rock-bottom prices, it stops being a differentiated product – it becomes a commodity. Unique features get drowned out as basic functionality becomes “commonplace” and widely available.
- Market Restructuring: Prolonged price wars often drive weaker players out or into mergers. Markets consolidate (as we’ll see with Slack vs Teams), much like how prolonged trade wars can realign supply chains to a few dominant hubs.
Below, we explore how history is rife with these “tariff-like” price wars in software – from early cloud computing battles to today’s AI and SaaS tool skirmishes, and what strategic lessons they hold.
Cloud Infrastructure: Early 2010s Race to the Bottom
Cloud storage prices plummeted in the early 2010s as AWS, Google, and Azure engaged in repeated price cuts (per GB per month costs fell by 80%+), before stabilizing in late 2010s.
One of the first major software price wars unfolded in cloud computing.
In the early 2010s, Amazon Web Services (AWS) and its new rivals (notably Google Cloud Platform and Microsoft Azure) entered a “race to the bottom” on pricing. AWS had a strategy of continual price reductions, over 100 price cuts since launching in 2006, to pass on its economies of scale to customers and undercut competitors. This was not a one-sided effort; Google and Microsoft responded in kind.
Notably, between 2010 and 2014, Google slashed its cloud storage prices by 85% while AWS dropped S3 storage prices by a similar 84%.
These rapid, tit-for-tat price changes mirrored a trade tariff battle, with each player willing to sacrifice per-unit revenue in exchange for market dominance.
The outcome was profoundly deflationary for computing costs. Renting servers or storing data became dramatically cheaper, by an order of magnitude within a few years. For example:
- AWS EC2 virtual machine pricing steadily declined.
- Public pricing records show AWS made 107 distinct price reductions by 2021, cementing its stance that price cuts were a standard, recurring feature of its strategy.
For customers, this was a windfall. Startups gained access to world-class infrastructure at a fraction of earlier costs, catalyzing a generation of cloud-native innovation. For cloud providers, however, it was a margin-squeezing struggle for share, one that only the largest platforms could survive. Like prolonged trade wars, the pricing battle weeded out smaller competitors and concentrated power in the hands of a few.
By the late 2010s, the most dramatic price reductions had slowed. The core prices for compute and storage stabilized post-2017, and vendors shifted tactics:
- Rather than further cuts, they introduced new low-cost tiers.
- They began monetizing peripherals, such as charging more for data egress, to offset core commoditization.
The cloud price war shows that deflationary pricing can “reset” an entire industry’s cost structure, creating a new normal. Any new entrant now must match the low price expectations or offer clear extra value. For customers it was a boon, but for providers it was a long fight for market share, one that only the largest players survived, which is exactly how protracted trade wars often play out as well.
Collaboration Tools: Slack vs. Teams and the Bundling Battle
Another classic price war played out in the mid-2010s between Slack and Microsoft teams.
Slack, launched in 2013, grew rapidly thanks to its innovative chat platform and a freemium model, free for basic use, then paid tiers per user. By 2017, Slack was a breakout success, widely adopted by startups and tech-forward enterprises.
Microsoft took notice and responded, not by building a superior product or competing on price directly, but by bundling Teams into its Office 365 suite at no additional cost. This was the software equivalent of a tariff tactic: Microsoft used its Office monopoly to distribute Teams “for free” to millions of businesses, effectively undercutting Slack’s standalone pricing model.
The impact was immediate and sweeping:
- Teams’ user base exploded, overtaking Slack within just a couple of years.
- By the end of 2019, Teams had 20 million daily users compared to Slack’s 12 million, despite Slack’s head start.
- As of 2024, Teams has 320 million active users, while Slack remains at around 38 million daily users.
This bundling, combined with Microsoft’s massive distribution reach, made Teams the default for Office customers, a huge pricing advantage. For many cost-conscious companies, even those that preferred Slack’s user experience, it was hard to justify paying $6-8 per user per month for Slack when Teams came bundled with software they were already paying for. Small and mid-sized businesses began switching en masse, seeing Microsoft’s bundle as “better value for money.”
Slack fought back by doubling down on product quality and differentiation, but it was an uphill battle. In 2020, Slack filed an antitrust complaint arguing that Microsoft’s tying of Teams with Office was anti-competitive. Regulators in the EU later echoed this, stating that the bundling gave Teams an unfair “distribution advantage” over rivals.
But regardless of the legal outcomes, the damage was already done. This bundling-based price war forced Slack into a defensive position, ultimately contributing to its decision to sell to Salesforce rather than continue as an independent company.
It’s a vivid example of how pricing strategy, specifically zero pricing via bundling, can reshape a market. A once-dominant startup was effectively absorbed, and customer expectations shifted: collaboration tools were now expected to come “free” as part of larger suites.
Much like a tariff in a global trade war, Microsoft’s bundling made it economically untenable for customers to choose a standalone alternative, even one they loved.
E-Signatures Commoditized: DocuSign’s Pricing Pivot
When a novel software category matures, commoditization and price-based competition are almost inevitable. Electronic signatures are a case in point.
DocuSign, a pioneer in e-signature software, initially enjoyed years of growth with a usage-based pricing model (charging per envelope/document signed). This worked well when the technology was new and clearly saved money for customers. But by the late 2010s, e-signatures had become table stakes, many competitors emerged offering similar functionality, often cheaper or even bundled into broader offerings. DocuSign’s edge eroded as “competitors like Adobe Sign and HelloSign (Dropbox) offered similar capabilities, sometimes at lower price points or as part of broader service offerings.” In other words, basic e-sign became a commodity.
DocuSign faced two big challenges due to this price war dynamic:
- Market saturation: customers had many low-cost alternatives for simple signing, reducing willingness to pay a premium.
- Volume limits: many customers had already integrated e-sign heavily and weren’t going to increase volume, capping DocuSign’s growth if it stuck to per-use pricing.
Instead of joining the race to the bottom, DocuSign made a strategic pricing pivot:
- Shifted from usage-based to feature-based packaging.
- Rather than selling envelopes, DocuSign restructured its pricing tiers around value-added capabilities that competitors lacked, including:
- Workflow automation
- AI-driven document analysis
- Enhanced security features
- Deep enterprise integrations
This approach reframed DocuSign as a premium solution, not just a digital paperwork tool.
Importantly, the company didn’t abandon usage pricing entirely. It:
- Maintained dual pricing models.
- Gradually introduced plans with unlimited envelopes at higher tiers.
This allowed DocuSign to preserve flexibility and transition customers at their own pace.
This pricing evolution achieved several goals:
- Retained enterprise customers who valued advanced features.
- Avoided margin erosion that would’ve come with price cuts.
- Enabled continued revenue growth in a commoditized market.
The e-signature saga, which is documented in Price to Scale Vol2, shows that when a product becomes commoditized, the answer isn’t always to slash prices, it can be to change the pricing model entirely.
They aligned pricing with customer segmentation:
- SMBs could still use volume-based, lower-cost plans.
- Enterprises paid more for richer functionality and integrations.
This is similar to how a country facing tariff pressure might move upmarket to higher-value exports, rather than compete purely on price.
By adapting its pricing strategy, DocuSign weathered the commoditization wave, at a time when "everyone and their brother" had an e-sign product.
Email Marketing: Freemium’s Legacy and 2023’s Pricing Shifts
Email marketing tools have also seen their share of price-driven competition over the past decade. Mailchimp is a prime example. In the early 2010s, Mailchimp’s bold use of a freemium model (allowing substantial use of the product for free) was akin to a unilateral tariff cut, it dramatically lowered the cost barrier for small businesses to start email marketing.
By 2019:
- Users could manage up to 2,000 subscribers and send 12,000 emails/month entirely free (see fig 1).
- This “free export” of functionality pressured legacy players like Constant Contact and sparked a wave of imitators.
- The result: a deflationary trend across the category, basic email services became cheap or free at entry-level.
However, as Mailchimp gained dominance (and was acquired by Intuit in 2021), it began pulling back on free usage, effectively imposing a tariff after years of free trade. In early 2022, Mailchimp announced it was severely limiting its free tier: the contact limit was slashed from 2,000 down to 500 (a 75% reduction).
Shortly after, they also halved the monthly email sends allowed on free plans (from 2,500 to 1,000).
At the same time, prices on paid plans went up for many tiers. By early 2023, the generous “Forever Free” era was over, many users now had to either upgrade to paid plans (e.g. ~$10/month for a few hundred contacts, scaling to hundreds of dollars for larger lists) or leave the platform. As one analysis noted, within about 12 months Mailchimp’s changes meant “what was free in 2021 would now cost around $400 per year” for the same usage.
This about-face created opportunity for rivals.
Sensing user frustration, competitors moved swiftly:
- EmailOctopus ran campaigns saying Mailchimp "gives you no option but to upgrade."
- They offered 2,500 subscribers and 10,000 emails/month for free, returning to old deflationary pricing to attract disillusioned users.
The result: the category came full circle.
- First, low prices won market share.
- Now, as the leader tries to restore margin, rivals are poaching users by sticking to low-cost models.
Mailchimp’s journey is a case study in pricing lifecycle dynamics:
- Freemium (an “anti-tariff”) was a powerful market entry tool.
- But long-term success requires more than free, it requires adding value customers will pay for.
- Without clear differentiation (e.g., features, integrations), the risk of fragmentation looms, as budget-conscious users spread across cheaper tools.
Key takeaway: Pricing power isn’t permanent. Freemium gets you share, but sustainable growth demands a shift, from free to feature-rich, value-based monetization.
Generative AI: The 2023 Price War in AI Services
Over the past two years, Generative AI has emerged as the latest theater for aggressive pricing battles. What began with breakthrough, high-priced AI APIs, like OpenAI’s GPT-4 at launch, quickly escalated into a full-blown price war between tech giants and startups, especially through 2023–2024.
This played out almost like a textbook trade war in reverse: instead of protective tariffs or price hikes, we saw a relentless sequence of price cuts. Each provider raced to undercut the other in a bid to capture a surge in demand for AI capabilities.
OpenAI led the charge with dramatic reductions:
- In June 2023, they slashed the price of their text-embedding model by 75%, and cut GPT-3.5 Turbo input token costs by 25%.
- Around the same time, they introduced the ChatGPT API at just $0.002 per 1K tokens, nearly 10x cheaper than what the original GPT-3 models had charged.
- By late 2023, OpenAI doubled down with GPT-4 Turbo, offering:
- 3x cheaper input pricing
- 2x cheaper output pricing compared to GPT-4’s initial rates.
These are staggering price drops over just a few months, making cutting-edge AI dramatically more affordable, and setting a new bar for competitors.
The rest of the market responded swiftly:
- Google, in early 2024, reportedly cut prices on its generative models by over 70% to match or beat OpenAI. For example, when OpenAI halved the price of a GPT-4 variant, Google immediately responded by dropping PaLM model prices below that threshold, signaling it “will not be undersold on AI API pricing.”
- Anthropic, maker of Claude, also joined the fray, offering certain tasks at up to 95% lower prices than GPT-4 for input tokens.
- Microsoft took a strategic bundling route. It embedded AI copilot features into Azure, Office 365, and other core products, sometimes charging a premium, sometimes giving them away at no additional cost. The goal: neutralize standalone AI competitors by bundling generative AI into broader ecosystems.
This created a market dynamic with a “race to the bottom” feel, where players wield either massive capital reserves or bundling strategies to drive prices as close to zero as possible. The goal isn’t just to sell APIs, it’s to win users and lock in enterprise contracts.
The short-term impact of this GenAI price war is unambiguous:
- Generative AI capabilities are now vastly more accessible and affordable.
- What once required deep pockets, training or using large language models, is now within reach of startups and individual developers operating on modest budgets.
In effect, AI has been democratized, if not outright commoditized.
But there’s a growing downside to this relentless price competition. Just as zero tariffs can flood markets with cheap imports and destroy domestic industries, ultra-low-cost AI from a handful of dominant providers could destabilize the broader ecosystem.
Analysts are already warning about the implications:
- If all providers compete only on price, models risk becoming interchangeable. That means:
- Less product differentiation.
- Fewer incentives to invest in performance breakthroughs or novel architectures.
- Many apps today are just repackaging the same core models with little added value. If everyone is calling GPT-4 at $0.000x per token, why build something new?
- As one commentator put it: “A price war, in essence, taxes innovation, it rewards being slightly cheaper, not being a lot better.”
The result? A flattening of the innovation curve and a flood of generic offerings that do little more than wrap commoditized models in new UI.
Beyond product innovation, the broader market structure itself is under threat.
If only the biggest cloud players, Microsoft, Google, Amazon, can afford to deliver generative AI at near-zero margins, we risk ending up with just a few dominant “AI utilities.” These firms would effectively control the supply chain, creating:
- Dependency risk for the broader ecosystem.
- Eventual price hikes, once competition is wiped out, mirroring the classic outcome of price wars where today’s loss leaders become tomorrow’s monopolies.
The generative AI pricing free-for-all of 2023–2025 is a live case study in the double-edged nature of price wars:
- On the one hand, it has fueled massive adoption and delivered short-term consumer surplus.
- On the other, it poses long-term risks for sustainable innovation, business viability, and market diversity.
The critical challenge, and opportunity, will be this: Which companies can leverage low pricing as a strategic growth lever, without permanently destroying their ability to monetize differentiated value in the future?
Our Takeaway: Competing on Price Without Killing Value
Looking across examples in cloud infrastructure, collaboration software, e-signatures, email marketing, and now generative AI, a clear theme emerges: pricing is a powerful weapon, but also a double-edged sword.
Too often, companies treat pricing changes as reactive maneuvers or one-off tactics, rather than the strategic growth lever it truly is. In reality, pricing should never be an afterthought, it directly shapes enterprise value and market positioning.
Simply put: “Pricing strategy isn’t just about revenue, it’s a crucial lever for growth,”
and it must evolve thoughtfully as your market matures.
In our view, the companies that win price battles aren’t those that slash prices indiscriminately. They’re the ones who align their entire monetization strategy, segmentation, packaging, pricing metrics, rate setting and operations, to deliver superior value.
Here’s how software leaders can apply that mindset:
1. Align Pricing with Value and Segmentation
- Don’t cut prices across the board without a clear plan.
- Instead, tailor pricing and packaging to specific customer segments and their value perceptions.
- Example: DocuSign introduced feature-based packages to justify premium prices for enterprise users, while still offering volume-based plans for more price-sensitive SMBs.
- By aligning packaging and pricing metrics with what each segment values, you can compete on appropriate price points without eroding your overall value perception.
- Ask: Where can you differentiate, through product depth, support, integrations, and charge for that, while staying competitive on baseline needs.
Key takeaway: Compete where it makes strategic sense, and protect the perception of value elsewhere.
2. Use Pricing as a Proactive Growth Lever
- The best companies use pricing proactively, as a tool for growth, not just a response to threats.
- That could mean preemptively adjusting packaging or pricing before market forces force your hand.
- Example: Pushpay, facing lower-cost competitors, introduced new entry-level tiers for price-sensitive church clients.
- Or it might mean bundling products differently, as Zoom did with its all-in-one suite, to increase stickiness without cutting dollar prices.
- The objective is to make pricing changes that serve a growth hypothesis: expand usage, increase upsells, or gain market share.
- And most importantly, track the results to see what’s working.
Key takeaway: Pricing should serve strategic goals, not be dictated by your competitors’ moves.
Avoid the “Race to the Bottom” Trap
- If you’re in a full-blown price war, remember the long game.
- Competing on price alone is often a losing proposition, except for the largest players.
- As history shows, prolonged price wars lead to fewer market options, higher risks, and slower innovation, even if short-term prices drop.
- Focus instead on your unique value:
- Invest in product innovation and customer experience to avoid becoming a commodity.
- Hold firm on pricing for premium offerings and justify them through clear value.
- Consider targeted discounts or flexible models only where they’re strategically justified.
- Example: In generative AI, once users become accustomed to “free,” it becomes incredibly difficult to later charge meaningful prices.
- This “commodity death spiral” is hard to reverse, so any price cuts must be deployed carefully and with a plan to differentiate.
Key takeaway: Resist the urge to follow competitors into pricing traps, defend value to preserve long-term margins.
In Conclusion,
Price wars in software and services function a lot like tariffs in global trade: They can protect or grow market share in the short term, but they also reshape the competitive landscape.
The companies that navigate them best:
- Treat pricing as a strategic lever, not a panic button.
- Align price with product value, customer segmentation, and brand positioning.
- Understand that pricing influences retention, differentiation, and growth just as much as product innovation does.
History repeats itself: SaaS companies that react impulsively by cutting prices often fade away, while those who compete on value and use pricing to reinforce that value emerge stronger.
At Monetizely, we advise treating pricing as a core part of your growth strategy. When handled right, you can win on pricing and build long-term value, turning a potential price war into a springboard for durable, strategic growth.