When one company, or a group of companies, has a large enough market share in an industry, it may be able to push the price away from the equilibrium. This is called price leadership. This mainly occurs in industries with strong barriers to entry, for example the need for a large amount of capital to compete, where advanced technologies are required, or the government elects to only allow certain companies to control the market.
While in some cases the barriers to entry make it impossible for other companies to enter the market at all, in most cases, it means that smaller firms must accept the prices the price leader has chosen.
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What are the types of price leadership?
There are three main models of price leadership:
- barometric
- collusive
- dominant
Barometric: In weather, barometric pressure, or the local pressure exerted by the atmosphere, is used for weather forecasting. Similarly, some companies are particularly skillful at understanding the current mood of the market and making subtle price changes to stay in a lead position.
Since barometric price leadership relies on a company’s ability to better forecast the market, it is a particularly unstable form of price leadership. Since a barometric price leader cannot force its competition to change prices, this price leadership position only lasts until a mistake is made. Regardless, adept companies can use some proven tactics to raise their prices without upsetting its customers.
Collusive: This form of price leadership generally occurs in industries that have very high barriers to entry. In this case, a few very large companies, with known and similar cost structures and selling perfectly substitutable goods, collude to set a price point higher than would ordinarily occur naturally.
In some places, this is illegal. The most famous example is OPEC, which sets the supply of oil to manipulate the price—driving it up or down depending on economic conditions.
Dominant: This model occurs whenever there is one massive, marketing-controlling company in the same market as many smaller companies. In this case, the large player dominates the market and can set the prices, while all smaller companies are forced to follow the dominant player’s pricing model.
Similar to collusion, a dominant company could find itself in legal jeopardy if it uses its powers to set predatory prices in hopes of bankrupting competitors and enacting a full monopoly.
Regardless of the SaaS pricing template you choose, understanding what your prospective clients are willing to pay is important. When trying to figure out your market, consider all the different SaaS pricing models. If it makes sense, try to segment your customers with a tiered pricing model.
Baremetrics can help you understand the data coming from price experiments, reduce your churn, and stay on top of your revenue growth so that you can find your way to being the price leader.
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What conditions are necessary to make price leadership happen? (Inelastic, Elastic demand)
To gain a price leader position, your company needs to have some specific advantage over the rest of the market. The following are only a few of the ways you can gain price leadership.
- Large market share: By focusing on rapid growth, you can try to be bigger than all of your competition combined. As your market share grows over time, you will be able to push the price towards your target number.
- Trend knowledge: By paying close attention to all your company’s metrics, you can use your data to optimize your prices. Constant price experimentation is one of the best ways to guarantee your market forecasting is the best in the industry.
- Technology: Keep an eye on your clients and see what parts of your SaaS package they truly love. By having the best technology, you can garner a higher price from clients.
- Superior execution: It isn’t only the software that makes your company stand out, but also the execution. Having better customer service or lower downtime can be as important as the best functionality. Show your customers that you care and are listening to their concerns to instill loyalty.
By understanding your customer and knowing what you do best, you can match your strengths to their desires and earn more money by charging higher prices.
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Use Baremetrics to identify if there’s more potential for your business with higher prices
While being a price leader has many advantages to the firm, simply working towards such a goal is also advantageous. Sometimes a small pricing change can have an outsized effect on your revenue.
Instead of focusing solely on being the price leader in your sector, see if there is a specific niche you can carve out and then defend. By understanding your clients’ needs, you might be able to charge more by focusing your development time building the functionality they need.
Whatever clients are willing to pay, use Baremetrics to monitor your sales data.
Baremetrics makes it easy to collect and visualize all of your sales data. When you have many clients, some are subscribed on an annual basis while others monthly, with multiple tiers and various add-ons, it can be difficult to calculate your MRR (Monthly Recurring Revenue), ARR (Annual Recurring Revenue), LTV (Customer Lifetime Value), and so much more.
Thankfully, there is Baremetrics to do all of this for you.
Baremetrics can monitor all the data you need to see if you have optimized your pricing model to maximize your revenue stream. Integrating this innovative tool can make financial analysis seamless for your SaaS company, so start a free trial today.
