Price analysis is a shortcut to understanding what the market considers a fair and reasonable price. Instead of examining the specific cost and profit structure of your company and comparing it to the estimated costs and profits of competitors to determine the price point for your product, price analysis looks at the market to see what price points would be considered acceptable by customers.
Sometimes the information needed for a more in-depth analysis of the market isn’t available, or the timeframe in which you need to make a decision is too short for a more accurate pricing strategy. In this case, looking to competitors and gauging client reactions to pricing experiments is both sufficient and better for its timeliness.
Cost analysis is a companion term. It is the dissection of the entire service to determine the likely cost behind each portion to come up with an estimate of a vendor’s cost structure. From there, in consideration of the normal markup of your industry, you can determine whether their pricing strategy is reasonable.
Both price analysis and cost analysis are useful for determining how you should price your SaaS subscription, as well as for costing the products and services you use to develop, market, and render your software service.
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Competitive Price Analysis
A competitive price analysis entails the evaluation of how consumers react to new prices. It is generally based on historical data or some form of polling. We discuss some ways to gather consumer behavior a bit more below. In general, price analysis examines how customers respond to a price based on their perceived value, instead of the costs to produce the product or service, or the profit generated by the company.
The key benefit of competitive price analysis is that it mirrors the actions of typical consumers. The vast majority of consumers compare the prices, as well as quality, features, convenience, etc., of products before deciding which to purchase.
If you want your product to stand out as being the cheapest, highest quality, or best value-for-money option, then you need to be doing the same. You should be intimately aware of all the comparative products on the market, their features, what they cost, and even how and where they are marketed. You can use all that information to help be the final choice of consumers as they peruse the marketplace.
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How to Implement a Competitive Price Analysis
Now that you have a basic grasp of what competitive price analysis is and why it is important, let’s look at a detailed methodology for performing a successful competitive price analysis.
1. Gather high-quality data. It is absolutely crucial to start your analysis with high-quality data, and as much data as you can find. Data also needs to be timely. If your data is six months out of date, it is useless. In some cases, if it is 15 minutes out of date, it is less effective.
2. Define your data parameters. You need to know what is important and what isn’t to effectively analyze the market. This is how you pull the information from the data. For example, if you can follow the promotions of your competitors in real time, then you can see how the peaks and valleys in their prices translate to higher or lower sales for you. It might be that you are priced too high, that your own promos are not well timed to those of your competitors, or that your customers are fairly price inelastic and you can raise prices for a higher margin.
3. Categorize your competitors. Once you have evaluated the market, defined the parameters you need to track, and are gathering high-quality and timely data, it is time to categorize the other companies in your market.
One way of categorizing them is into your primary, secondary, and tertiary competition.
Primary competition includes all the direct competitors competing for the same customers as you with a similar service.
Secondary competition includes all companies that are targeting the same product class as you, but they are slightly different in configuration. For example, they might be the high-price, high-quality version of your product or the cheap and rudimentary one.
Tertiary competition includes the companies that are selling products similar to yours. These companies are important to track as well in case you want to expand the number of products you offer.
4. Use machine-based pricing tools. When you have a real-time understanding of your market, it becomes possible to use advanced algorithms to control your pricing strategy. In this case, the data is processed by the algorithm to see how the market is changing moment by moment. Then, the same algorithm can constantly tweak your prices to gauge the reaction of your customers and push your profit higher. These precision pricing strategies can really improve the profitability of a company.
As an added bonus, by allowing an algorithm to perform your competitive price analysis and set your prices automatically, you are free to spend time on more important work. For example, you can focus on the long-term strategy of your company, or start developing your next service line.
5. Track competitors’ social media activity. Although your competitor’s pricing is the single most important item to track, it isn’t the only thing worth watching. You can get a great deal of information by following their social media. See what they are posting and how much engagement different posts receive. In this way, you might be able to time and word your own posts to garner more interactions.
Whatever your SaaS pricing template, understanding what your competitors are doing is important. When using that information to set your pricing strategy, consider all the different SaaS pricing models. If it makes sense, try to segment your customers with a tiered pricing model.
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What is your customer willing to pay?
One of the hardest questions in business to answer is: What is your customer’s willingness to pay? This tells you exactly how much you can charge a customer for your product before they walk to a competitor or exit the market entirely. Every prospective client has a different willingness to pay, and it is based on their personal characteristics, market characteristics, the current state of the world, and so much more.
One key term when contemplating a customer’s willingness to pay is their price elasticity. Price elasticity simply means the amount demand changes when price changes. A perfectly elastic market will crash with even the smallest price increase, whereas a perfectly inelastic market will absorb any price increase without a change in demand.
In general, things you need that have no similar substitute goods have very low elasticity (e.g., rent), whereas luxury goods with many similar items on the market have high elasticity (e.g., meals at restaurants). In some cases, it is possible to raise prices without upsetting customers (if done carefully), while in other cases you might see high churn.
Conduct a pricing experiment
Conducting a pricing experiment is something that every SaaS business should do, and it’s better to do them often. One common method is performing a survey. You can do this by phone, mail, email, or using a survey platform. Be sure to choose your survey population carefully so it matches your customer profile. Otherwise, the data you collect will be flawed and any pricing decisions you make are sure to be less than optimum.
Sometimes a small pricing change can drastically change the profitability of your company. Whatever clients are willing to pay, use Baremetrics to monitor your sales data. Combined with good data from your competitors, this is the easiest way to ensure your prices are in line with the market and maximizing your revenue.
Baremetrics makes it easy to collect and visualize all of your sales data. It can be difficult to calculate your MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), LTV (Customer Lifetime Value), etc. That’s why there is Baremetrics to do it all for you.
Baremetrics can monitor all the data you need to see if you have optimized your pricing model based on your competition. Integrating this innovative tool can make financial analysis seamless for your SaaS company, so start a free trial today.
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