Only a few years ago, you were the company everyone talked about. You created a groundbreaking software category, attracted huge sums of venture funding and expertly scaled ARR. Just as an IPO was starting to look feasible, you hit a roadblock.
Now there’s a new cool kid on the block. This budding competitor co-opted your brilliant idea and started selling it at a cut-rate price. They’ve slowed your growth down to a halt and seem to copy you at every turn – ripping off your cutting-edge new feature and borrowing that brilliant new messaging you spent so much time perfecting.
You’ve only got three strategic options to compete and get your business back on track. You can 1) fight back, 2) hold firm or 3) retreat. Each has completely different implications for your pricing strategy.
Option 1: Fight Back
The most obvious way to compete is by fighting back on price. Starting a price war feels great, don’t get me wrong. It’s something that Sales can do almost immediately. It helps your team feel like they’re finally winning deals again, and puts your arrogant competitor back on their heels.
In fact, research from Simon-Kucher & Partners finds that up to three-in-five companies admit to being in an active price war. They almost always blame the price war on competitors, but if they were to look internally, would probably realize they had a hand in either causing or escalating it.
I rarely advocate for price wars, particularly in saturated markets where there is little volume left. Price wars typically erode profitability for entire industries and leave everyone worse off than before. They discourage investment and innovation. That said, there are a limited set of conditions when a price war may become a viable strategy.
- Secondary revenue streams are in sight, enabling you to re-balance monetization from one side of the market to the other.
- The market is poised to grow dramatically and you expect costs to come down accordingly due to economies of scale.
- You have a sustainable cost advantage and can withstand lower prices better than competitors.
- Network effects create a winner-takes-all market and you need low(er) prices to attract a sufficient number of users to benefit from said effects.
- The end game is to exit the market and you want to become enough of a nuisance that competitors will be tempted to acquire you.
Perhaps the most widely known SaaS price war is in cloud storage. Google, Amazon and Microsoft have repeatedly traded shots on bringing down the price of cloud computing services. This wasn’t by accident. Each of them have secondary revenue streams in mind, and getting a customer on their cloud likely means further monetization opportunities down the road. They also recognize that cloud computing is a rapidly growing market, with some analysts estimating a 26% CAGR over the next 5 years. In other words, these companies can afford to take a short-term hit with their pricing given the potential for long-term gains from customers they acquire in the process.
If these conditions don’t hold true for your business, however, you should consider a more narrow strategy: a fighter product. A fighter product is a stripped down version of your core offering at a lower price point. It’s goal is to help you compete for the price sensitive segment of the market without (overly) cannibalizing existing customers who are happy to pay a premium price.
The fighter product strategy commonly appears in the B2C world. Take Procter & Gamble for example. As described by the Harvard Business Review, in the 1980’s P&G had two premium diaper brands, Pampers (#1 in market share) and Luvs (#3). They suddenly faced rising competitive pressure from private label, which started buying market share through cut-rate prices. Rather than engage in an all-out price war, which would have dented profits, P&G took a more nuanced route. They lowered the price of Luvs by 16% while stripping both cost and value out of the product. They cut Luvs’ spend on advertising, product innovation and promotions. At the same time, P&G held firm on price with their market-leading Pampers brand and increased the gap in value between the two brands. This helped P&G compete at both ends of the diaper market without sacrificing the profitability of the overall portfolio.
You can apply these same lessons to SaaS. Perhaps make your fighter product only available for purchase online via self-service, thereby bringing down customer acquisition costs. Make the product as easy as possible for customers to self-onboard and use, minimizing services, support and account management burden. Add limitations around product usage, number of users or features to make it clearly inferior to your core offering while still being attractive enough for smaller or less mature prospects.
Option 2: Hold Firm
Holding firm is a painful strategy, requiring both discipline and patience. It can feel like you’re doing nothing, sitting idly by while your competitor eats your lunch. In reality, this may be the most rational option for a business that’s operating in a small market or that wants to focus on profitability. Doing it right entails doubling down on customer retention and investing in smart product innovation. It also requires redesigning compensation plans to retain a Sales team that’s not allowed to discount and keeps getting beat on price.
First, make it as difficult as possible for competitors to pick off your existing customers. Ensure you have top-notch account support and that you listen closely to their feedback. Migrate loyal customers from month-to-month contracts to longer-term deals, even if it means throwing in some extra services or product in the process. If customers remain happy, they won’t be tempted to rip-and-replace your solution and all of the pain that entails. Loyal customers are your bank while you wait out competitors’ aggressive pricing. (Once their venture funding starts to run dry, odds are they’ll start focusing on profitability and raising prices, too.)
Second, continue to invest in a targeted set of new capabilities that will create more competitive differentiation, justify your premium price point and lead to ancillary revenue streams with existing customers. This again requires significant time and attention collecting feedback from your customers and prioritizing your product backlog based on customer interest and willingness to pay.
Revisit your Sales compensation plans both to correct any misaligned incentives and to continue to retain high performing reps. Perhaps reduce the size of quotas since reps won’t have the ability to substantially discount to close deals. Consider adding a price quality element to your plans to further reward reps when deals come in at or near list price.
You can also hold firm by focusing on a few key segments of the market that you know the competitor will have a hard time going after. This entails splitting your market into different categories, for instance based on company size (SMB, Midmarket, and Enterprise), industry vertical or tech stack, and prioritizing pieces of the market. Prioritize the market segments that are attractive to you (i.e. they’re large, growing), where you’ve already seen traction (i.e. you have a high win rate, top-tier logos) and where you have a sustainable advantage. This might be a pocket like Healthcare or Financial Services, for example, which both have specific requirements, deep pockets and a limited appetite for risk.
When you pick your battles and focus on a subset of the market, you have a better shot at expanding your competitive moat with differentiated features, market leadership and a robust partner ecosystem. It increases the amount of effort for competitors to follow you, helping you maintain pricing power.
Option 3: Retreat
Nobody wants to talk about this last option. If all else fails, you may be forced to strategically exit the existing business and sell something else. Oddly enough, this could lead you to actually raise your prices to squeeze more out of legacy customers and fuel innovation in another part of your business. Evidence shows that when a market starts to be disrupted by technological innovation, the least loyal and most price sensitive customers are the first to go. Those who remain tend to either highly value the product or face significant barriers to switching.
AOL makes for an interesting case in point. Back in the early aughts, AOL’s dial-up internet business faced stiff competition from broadband, which would of course spell the company’s demise. Instead of fighting back with lower prices, AOL raised them from $21.95 per month to $23.90 per month. This move generated an estimated $100 million in additional revenue, which AOL plowed into other ventures like content and advertising.
Similarly, when confronted with a declining subscriber base due to free online competitors, newspapers have responded by raising the price of their print versions. This has helped newspapers buy time to change their business models and invest in new revenue streams like digital subscriptions, paid content, native advertising, membership programs, events and eCommerce. While their outlook is by no means rosy, newspapers have owned up to their future and smartly retreated to sunnier skies.
Choosing the Right Path for Your Business
Each strategic option comes with its own benefits and drawbacks so think carefully before selecting which is best for you. Once you’ve decided the best path forward, you need to fully commit to seeing it through. A half-hearted execution, with Sales, Marketing and Product all operating independently, will get you nowhere.
Have you found yourself in this situation? What have you done to compete? Was it successful? We’d love to hear from you in the comments!