I am just venturing into a new product and one thing I realised is that "Price is the ONLY one advantage" I have. I have solid web-development experience and I can build web apps in a fraction of time and money. Is this makes sense to go ahead?
Also, I am talking about a SAAS based product catering to small businesses. The prices would $19.99 per month and I am thinking of selling it at $9.99 per month.
I thought a bit more about this especially after reading the comments, personally I think you can and you can create even billion dollar firms as well. Zoho and Infosys comes into my mind whose main focus is to reduce the costs by leveraging offshore resources. Isn't it?
Thanks in advance
You could -- but do you really want to?
Pricing works as the only variable in comptetative advantage in the purchase of a true commodity -- where there is a clear apple-apple comparison. The less "value-add" there is on the commodity the more important the price will be. The more cost conscious your target market -- the more important price will be as a variable. The more the customers view the products or services to be the same -- the more important price will be.
In all markets there are billions of dollar spent on marketing professionals to ensure that a prospective customer makes a choice based on the variables that favor their product or service.
All of us make purchases every day where we spend more for a host of marginally defensable reasons. On Saturday I was at the local Home Depot. I purchased the Scott's brand top soil over the store brand. It was about 50 cents a bag more. Why did I pay more for essentially the same dirt for my garden? I don't know. It was illogical. Perhaps I liked the nice green and yellow bag better. Perhaps I thought that there might be something different. Darn those marketers. I just bought "yuppy" composted dirt. I rarely choose the low cost provider on services that I need to be around for a while -- like SaaS. I want to know that if I migrate my data and change my work patterns - I want to know that the provider is the most likely to be around in 12-24-36 months. A startup that is low cost (unless it is financially well backed raises red flags for me as a purchaser)
I don't know your product or service -- but just knowing that it is a SaaS immediately starts the wheels turning on all of the potential varialbes -- other than price-- that would make a customeer choose your service (or your competitors) over another -- even if the actual product was exactly the same.
You also don't know that the current providers in the market are unable to provide the service for what you quoted but have learned that the market will bear more, so they are charging more. In that case they could meet -- or even beat your pricing. If you started to eat at their market share I expect that they would. And they have built up a history of margin in which to fight you back.
Perhaps rather than basing your marketing strategy on price you can find a core value proposition, charge an equal or slightly less amount, and put those extra margins in creating a features that will further enhance your competitive advantage.
This is the classic Coke vs. Pepsi example. They can each make their soda 5 cents cheaper until they kill each other businesses. This is good for consumer in the short term, but not for your business.
Your business will have to survive on thin margins, and maybe take a loss due to poor pricing, which will be bad for your customers over the long term if you have to stop your service due to the loss.
I agree with everything Joseph just said and would like to add. Why would you lower your price by 50% to start? If you are going to sell on price at least start much closer to your competitor - like $17.99. That's a 10% discount. You can always lower it further if you need to but it is very, very hard to raise prices.
In the meantime, You need to look hard for an unfair advantage because competing on price alone isn't going to be any fun at all.
"Unfair Advantage: Something that cannot be copied or bought.
- Jason Cohen, A smart bear"
I think what you're saying boils down to:
"I'm a great web app developer. I'm not sure what to develop. One thing I can do is take an existing solution and deliver a viable alternative, at a lower price."
You're describing a classic market entry strategy - one that can be successful or blow up in your face.
Let's think about the main issues.
First, it's true for just about everything you can think of online that there's no bottom price buffer: what your competitor does for $20, what you'll do for $10, someone else will do for $5. If price is all you have long-term, it will never be enough. So, be realistic about the window of opportunity low price buys you.
Second, it's often the case that in competitive markers, prices move so that expected profits move to zero - that is, that acquisition costs are only barely matched by revenues. There's no universal formula, but crudely, monthly fees X average months to customer churn. The market leader may be showing you something about their experience of the market - and low pricing may be a trap. Part of Google's profit engine is all about harvesting that, increasing the market cost of acquisition through keyword bidding. So, be careful to budget promotional costs accordingly.
Third, you need to be very clear about your proposition and how it interacts with the established offering(s). Are you going to be essentially a clone, are you going to do more, are you going to do less, or are you going to do it differently? You may already be clear about this, or it may be a choice you face. You need to think hard about how to communicate value to your customers. For instance, if you decide to deliver 90% of the value for half the cost, you have a clear rationale for pricing in the mind of your customer. If you're up against a minimalist, but premium-priced product, you need to avoid a situation where potential customers read the price difference as suspicious, an indication of problems. So, copy products can't just be cheaper, they must always make sense of the price differential for the customer.
Copy products don't usually win kudos with investors, because by definition they tend to find niches in other people's spaces rather than create new markets. But in my view, if you're careful, realistic and concerned to give real value to customers, there are great opportunities in the world of "me too."
As Henry Ford said, "The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed. "
it's all a question of perceived value. Regardless of price, you have to have an independent group of people compare your site to your competitor's site and determine who's "perceived" value is higher.
If I think I am getting more (and more doesn't mean just features but reliability, peace of mind) from something that costs me $10 more a month- it may be worth it. IF there aren't killer features that I need that exist only on your site - I may not go with your solution - I may prefer to pay more.
Remember, people determine value mainly by "looking". if you site is not as sharp/graphically designed as your compatitor's, you may still lose even when lowering your price.
Also, another thing to consider is who's your target clientele and what kind of volume you're looking to see from that clientele. For huge corporations, the difference between $9 to $19 a month could be important when talking large volumes - but they'd easily choose the more expensive option for 100 "users" if they perceive more value from the other guys.
Gotta consider that. In a perfect world - winning on price works only with comparable solutions in features and value. If you're selling me less features or less "perceived value" for less money - i may still choose your competitor even if you're cheaper.
Yes! Price can be the ONLY competitive advantage. Though, I am not sure in the web development niche.
To make an obvious example, if you are able to sell gasoline at a lower price than your competitors, you certainly have a substantial competitive advantage. The reason for this is that the product is so standardized.
If you are able to mend the rules of the web development game to make it more of a standardized product, maybe by making check-box pricing like when you configure your Dell computer with something like these options:
In this way you might be able to force your competitors into competing on price, which they will do everything they can to avoid if they know they will loose.