In a recent video titled "How To Price Software Against Competition" from the channel "AI, SaaS & Agentic Pricing with Monetizely," pricing expert Ajit Pal Ghuman addresses what he calls "the number one most asked question" in SaaS pricing: how to price in relation to competitors. Throughout the video, Ajit shares insights from his experience as a pricing consultant and provides strategic frameworks for positioning your product in both established and emerging markets.
The Dangers of Comparison Mindset
When you ask how to price in relation to competitors, you're immediately placing yourself in what Ajit calls a "comparison mindset." This approach might be limiting your vision and strategy.
"Once you are asking this question, you are implicitly in a certain mindset. You are implicitly in a comparison mindset," Ajit explains in the video.
This mindset assumes you're operating in what strategy experts call a "red ocean" - a crowded marketplace with established competitors and commoditized offerings. But what if your product doesn't fit neatly into this category?
Blue Ocean vs. Red Ocean: Where Does Your Product Fit?
Ajit makes an important distinction between two market environments:
- Blue Ocean: When launching a truly innovative product with few or no direct competitors
- Red Ocean: When entering an established market with many similar offerings
"Think of back in the day when CRM was not even CRM, when you started to automate all of these opportunities for the Salesforce, these Rolexes, you didn't have a term CRM for all of this. That was blue ocean," Ajit notes, contrasting this with: "Think today, if you're coming out with yet another customer support chat bot, that's a red ocean environment."
Before applying competitive pricing strategies, it's crucial to honestly assess where your product sits on this spectrum. Many products exist somewhere in the middle, in categories that are still forming.
Strategic Pricing Against Competitors: Real-World Examples
For products competing in established or forming categories, Ajit shares instructive case studies:
The Amplitude vs. Mixpanel Strategy
"When Amplitude launched in 2016, Mixpanel was a product analytics vendor that was giving out around 1 million free events. Amplitude came in at 10 million free events at that point in their free tier. This was a very specific particular strategy to get users from Mixpanel," Ajit shares from his firsthand knowledge, having interviewed with Amplitude around 2017-18.
The Mandrill vs. SendGrid Price War
In another example from the email delivery space: "He spoke about a time where there was this price war between Mandrill and Sendgrid. Mandrill was a product that MailChimp had introduced. Later on they had removed that and they went back to their traditional email marketing routes. But when Mandrill came out, Sendgrid had to really increase the number of free emails that they were providing."
The Risks of Undercutting Competitors
While lowering prices below competitors can be effective for customer acquisition, Ajit warns of significant risks:
"Pricing in the world of SaaS and AI nowadays is like catching a dropping knife. You're going to undercut tomorrow, you're going to have a price war. If the competitor is a lot more financially stable, you may end up losing."
Before engaging in price competition, companies must thoroughly understand their financial situation and cost to serve customers.
The Differentiation Imperative
If you want to charge premium prices compared to competitors, you need clear differentiation. This might come through:
- Additional product features
- Complementary service offerings
- Superior positioning and marketing
"If you have to price higher, then you may actually have to build more product, you may have to build more services or your positioning games should be much higher," Ajit explains.
The Power of Positioning
One of the most underappreciated aspects of pricing strategy among startups is the power of differentiation through positioning and marketing alone:
"When you are talking about cigarette brands, there's not much difference between cigarettes. When you're talking about soap brands, there's not much difference between soap. When you're talking about breakfast cereal, all these things are very much alike, yet they are significantly differentiated."
Ajit emphasizes that companies can create meaningful differentiation through marketing and positioning even when their products are functionally similar to competitors'. However, this requires significant investment in these areas.
"If you decide you want to charge a premium, then you have to focus a lot more on the positioning and marketing and making sure that you can extract that premium. So it won't be as simple a decision as 'I'll price higher.' Price higher has real world implications on how your marketing motion works."
Key Takeaways for SaaS Pricing Strategy
When pricing against competitors, consider these approaches:
- Assess your market position: Are you truly in a blue ocean, red ocean, or somewhere in between?
- Consider undercutting competitors: Effective for customer acquisition but beware of price wars
- Match competitor pricing: A safe option when differentiation is minimal
- Premium pricing: Requires either significant product/service differentiation or exceptional positioning
The most important takeaway is that pricing decisions are never isolated from your broader strategy. They should align with your product differentiation, financial situation, and marketing capabilities to create a sustainable competitive advantage.
Conclusion
Pricing in relation to competitors is a common but potentially limiting framework for SaaS companies. By understanding your market position, differentiating factors, and the implications of various pricing strategies, you can make more informed decisions that support your company's growth objectives beyond simple competitive comparison.
For deeper guidance or support on pricing strategy, we recommend connecting with Monetizely. You may also feel free to schedule a call with the founders.