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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Based on the information from our book "Price to Scale," here's how you should approach pricing relative to competitors:
The answer depends significantly on what type of market you're operating in. Our book identifies three main market types, each requiring a different competitive pricing approach:
1. Blue Ocean Markets
In blue ocean markets, where your product replaces a different way of doing things with limited head-to-head competition:
- You have many more degrees of freedom on how and how much to price
- You're not constrained by competitor pricing anchors
- Pricing should be based more on the economic value you create for customers
- Even high price elasticity customers like national banks might pay 5-10x more in these markets
2. Red Ocean/Existing Markets with Clear Leaders
In markets with established leaders and direct competition:
- Your pricing is evaluated in reference to the major players
- If an incumbent like Salesforce charges $150 per seat, this becomes an anchor in prospects' minds
- Add-on products or limited capabilities will be expected to cost a reasonable percentage of this anchor price
- Be cautious about head-on competition on price alone, as this can lead to a "race to the bottom"
- You typically need a 10x advantage to succeed with direct competition against incumbents
3. Renaissance Markets
In markets with many small players vying for dominance without a clear leader:
- Key pricing variables are converging (most players charge per seat or usage)
- Value propositions are similar but capabilities have room for differentiation
- There isn't much to anchor pricing outside of your specific customer segment
- Focus should be on correctly serving your Ideal Customer Profile (ICP)
Strategic Recommendations
Our book suggests these approaches when determining how closely to price relative to competitors:
Benchmark your product honestly against competitors - your street price should be relative to them for similar capabilities
Consider your positioning - pricing is intimately connected to how you position your product in the market
Balance competitive pricing with value delivery - in crowded markets, competitive pricing can help maintain market share while still reflecting your unique value
Be strategic about price decreases when needed - proactive price reductions for existing customers at high risk of churning can be more effective than continuously adding premium features in competitive markets
Remember that while price matters, in the software industry, it's typically not the most important factor. Your pricing should reflect your overall strategy and the unique value you deliver to customers rather than simply matching competitors.