If a new competitor enters the market undercutting everyone’s prices significantly, should we adjust our pricing to stay competitive, or hold our price and compete on value/quality instead of getting into a price war?

Based on the guidance in our SaaS pricing book, Price to Scale, it's generally advisable not to immediately slash your prices to match a new, lower-priced competitor. Instead, focus on competing on the distinct value and quality your product offers. Here’s how you can approach the situation:

• Direct Answer:
Hold your price and emphasize the superior value and quality of your product rather than engaging in a price war.

• Supporting Details from the Book:
In our book, we discuss how pricing pressure can lead to increased price sensitivity among customers (see pages 267 and 245). When competitors significantly undercut prices, lowering yours immediately can trigger a race to the bottom, diluting perceived value and profitability. Instead, we recommend differentiating by enhancing features or targeting distinct customer segments, ensuring that you appeal to both premium users and price-sensitive cohorts without compromising your brand equity.

• Strategic Considerations:

Competing on Value: Highlight the unique functionalities and improvements that justify your premium price. As noted in Price to Scale, this might include adding advanced features catering to specialized needs, thereby attracting advanced users willing to pay for the extra benefits.
Segmenting the Market: Tailor your approach to various customer segments by offering differentiated options. This proactive segmentation can help you maintain your premium pricing for high-value features while providing alternatives—such as upgrades or bundled discounts—for customers looking for cost-effective options.
Long-Term Brand Health: Focusing on quality and value helps maintain your product’s reputation over time, reducing the risk of margin erosion associated with continuous price cuts.

• Practical Application:
Evaluate how the new competitor's offering compares in terms of features, support, and overall quality. Consider reinforcing your value proposition with clear messaging and targeted enhancements that align with the needs of your most profitable segments. This strategy not only safeguards your margins but also strengthens your market position in the long run.

In summary, Price to Scale advises that when a new competitor undercuts market prices, maintaining your pricing while enhancing and communicating the unique value of your offering is usually the more sustainable and strategic move.