When thinking about pricing, do you base it on competitive alternatives or the value you deliver to customers? And what are the marketing trade-offs when choosing either option?

At Intercom we believe in value-based pricing, which means we price primarily, but not exclusively, according to the perceived value of our proudct to our target buyers. Competition is an important input, but unless you are selling a fully commoditized product for which many identical alternatives exist (ie. toothpaste), it shouldn't be the primary driver of your pricing. I could hold up two identical black rectangles labeled "smartphone" and put $999 on one and $599 on the other, then ask you "which one is an iPhone?" and I guarantee you'd know. They have the same features. They're probably made in some of the same factories. But they fetch very different values in the market, and one commands a premium. Not because it's better. But because buyers want it more.

That being said, the prices of competing products are important external reference points on the value of your product. Competitive insights are most helpful when it comes to analyzing pricing models and metrics rather than price levels. Price points are typically determined by customer research, financial analysis, conoint analysis, etc. But price metrics are important to validate against industry norms and customer mental models. This goes back to why PMM should drive pricing: you need to adequately differentiate your offering and compel your target buyers to see the highest value possible.

competitive insights can be hugely helpful when it comes to analyzing pricing models and metrics rather than levels - levels is something that customers will determine when you talk to them, but having an idea of industry norms for models and metrics is key, because it's so important to be aligned with competitors so that customers can wrap their head around pricing more quickly

Sometimes we go through the exercise of imaging what a specific customer would have to buy if our product didn't exist. It can be really enlightening.

Hands down the value you deliver. In an ideal world, you figure out the willingness-to-pay (WTP) for your product in the market, and set your price close to the WTP line (and above your costs).

WTP is usually figured out through research, both qual conversations with customers, partners, and key stakeholders like Sales and then quanty surveys out in the market (targeting your buyers) to get the actual price points. There are several research firms out there who can run this kind of work for you (or larger companies have teams that do this in-house).

You should ofcourse be aware of the competition and arm your reps to sell the value of your products (and address any competitive questions) but basing your pricing on the competition assumes that they have figured out the right price and you can accurately assess the difference in value between your products.

It’s always really tempting to look for “answers” among what competitors are doing. I think you should absolutely keep competitive moves in mind, but I would urge you to start from a place from the value you deliver and only rely on competition if you don’t think you can articulate the value well enough.

To understand why, here are some of the pitfalls of relying too heavily on competitive moves:

• Information asymmetry: You might think they’re basing a choice on sound information, but there’s a decent chance they’re not.
• Strategy: Relying too heavily on competitors ends up de facto creating your strategy vs controlling your own path.
• Value erosion: If the competition tends to do price cuts, it’s a quick way to get the market to a place of commoditization and competing on hyper functional benefits rather than value delivered.
• Perception: If you’re always changing in response to a competitor, people may start seeing you as a follower.

In fact, there are many times when you want a competitor to move first and see how it does for a bit. Then you can use that information to decide if it’s also a choice you want to make.

It would be best if you considered both options when determining a pricing strategy for a product - based on my experience, the answer typically lies between both options. You want to articulate what value you deliver to your customers and ensure your price is competitive.

Typically, when you base your pricing on competitive alternatives, customers can easily compare options across the marketplace and understand how you position vs. competitors. Marketing efforts usually anchor messaging that helps differentiate your offering through unique or better features vs. your key competitors (e.g., more options or faster outcomes vs. product Y).

Whereas pricing based on the value you deliver to customers entails more education to internal and external audiences as you need to educate what value you provide and why they should care about it. Marketing efforts typically anchor on social proof (e.g., testimonials, case studies, quotes, stats) to validate the value you deliver to your customers. 

Basically, you do both. 

Working for premium product companies, you tend to optimize for customer value learnings. 

And then obviously recognize the reality of a competitive environment. 

Something that surprises a lot of people is that you can shift your price up dramatically by presenting it in new ways. 

Let's say your competitor sells lemonade for $5. You sell for $6 (it's "hand-squeezed" so you get the premium). 

If you ask customers what they think lemonade should cost, most will say $5-$6 because that's what the anchor is. 

But assume it's a hot day and you've got ice shavings in your cooler. 

Now you ask customers whether they'd be willing to pay $10 for a Lemon Icee.

It's a little silly, but the same principle applies to SaaS. 

Break down your interview questions into new metrics (# of deals generated/saved, # of steps removed, $ value of winning 1 extra deal) and you might learn something new about how to pitch the price vs. a competitor.