Starting a competitor business based on price

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#1

Do you think starting a new SAAS startup in competition to an existing alternative for a fraction of a price is a good idea? Does anyone have experience in this?

We’re talking enterprise level software in business process management. My existing competitor has a highly used (2500 customers) SAAS product for the following prices (don’t be sick when you see these numbers:)

$15500/year EXCLUDING support. Support levels range from $2000-$11000 year.

Sure they are well supported and yes they provide an excellent product. But I currently work for a company who are refusing to use them based on price. The market is large.

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#2

I’m in a very similar situation but my conclusion is that this was a bad bad strategy. Pretty soon you are gonna have the same people leaving you for someone cheaper. You will be forced to drive your prices down further and further. You end up in a zero sum game.

Your competitor likely has clients because of the amount of value it generates them, and they stay with them because they also see the value generated.

I’m now focusing on trying to deliver the same if not more value but not at reduced costs but based on transparency and value delivered. If that does end up being cheaper than I think it’s okay but lowering price for the sake of competing via prices alone is not good imo.

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#3

Fair enough.

Im just trying to create the same value as what they do initially, at a fraction of the price. Then I will expand functionality based on customer feedback.

However its difficult to know what price to price yourself at when your competitors charge so much.

I would say clients stay with a competitor due to their household name in that vertical. Its hard to put a financial cost on building a trustworthy brand…

#4

If you can truly deliver a competing product for less I think the price based strategy can work. Yes, bottom feeder customers will leave for even lower prices, but in B2B this is generally not a giant issue. The cost for them to retrain and regroup after moving to a new system usually far exceed the cost of the software. However, once a company is set on moving software then price does matter and if you’re cheaper that is a point in your corner usually.

The main thing though is usually for a product in the 15K+ range there’s a big service component. Not always, but usually. So you have to figure out if you can do that service (probably not, but sometimes bootstrappers can) or if the price difference gives you a big enough group of customers who want to pay less and don’t care if they get a little less hand holding because of it.

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#5

I think there’s always room for a cheaper alternative but I wouldn’t position it that way. Some better options that come to mind:

  1. If there’s a big service component then be the self serve version.
  2. Be the cut down version for people who don’t need every feature your competitor offers.
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#6

I think competing on price is never a good strategy, but it doesn’t mean you can’t have a legitimate strategy where your price is much lower. For example if they are selling for $15k per year it is likely their sales process involves sales people in suits giving onsite demos (that means traveling sales people, hotels, flights etc), supply and installation of hardware and basically all the ‘process’ involved in enterprise sales.

If you have a large potential market as you say (100,000+) then you can offer an alternative without the expensive sales process, they just signup and try it themselves. There will be a significant number of clients who prefer this. You still need to be proactive in supporting the new signups and you can still give demo’s remotely and do phone and email support, but you won’t fly someone to their office due to a HDD crash.

It is a more modern strategy IMO and one that is seeing lots of users of more expensive software moving to us.

#7

Wow thanks all for the feedback. I think the problem with the business is that it is currently a product being sold by companies with men in suits.

However my marketing research through google adwords and various forums leads me to believe that this doesnt have to be the way forever. If I can also get buy-in from consultants/partners who would use the software for clients, i believe that the additional revenue source could be very beneficial. Also google research into current keywords and potential long-tail keywords leads me to believe that end users are beginning to search themselves.

#8

Competing on Price alone is a bad idea.

However, if you can compete on lower-costs, that’s a GREAT model, and in large part the basis of Clayton Christenson (Harvard Biz school)'s idea of Low End Distruption.

If I can come in and do Job X in a more efficient (economical way) (think AirBnB to hotels, Microsoft to Sun, Intel to Sun, etc.) THEN I can charge less without sacrificing margins.
And the incumbent can’t match me if they are locked into an old model. In the above example, hotels and Sun had tons of capital invested in an old model (hotels that are underutelized and very high end hardware). Both over-served their customers.

#9

courtz, you need to understand your market better.

If your potential customers are paying 15k+ for a software license, they are not finding that software on a google search. Sales people are finding them and taking them through a 3-12 month sales cycle, followed by a huge integration and consulting process integrating the software into their business processes.

If you think you can replicate the enormous value the incumbent is providing and offer that at the sort of price point where people are going to sign up after seeing an adwords ad (e.g. $50 a month) then either:

a) the incumbents customers are incredibly over-served and need a tiny fraction of the features they are being sold; or
b) you don’t understand what their customers actually using the software for and have vastly underestimated the effort in reproducing an equivalent.

If you think the market is truly over-served (see examples of this low end disruption happening like ryanair, airbnb, etc) then get out there and talk to some potential customers: get them to put some money on the table, the value proposition should be a pretty easy sell.

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#10

Can you point us to the company in question? I think that would give us a much better idea of whether this might be a good idea or not.

#11

I don’t necessarily agree with this. My experience is that vertical market software in price bracket is based upon an old model were there was an expectation that users weren’t computer savvy and needed hand holding and every point during the process. In a lot of cases this is no longer correct, the users are very good computer users, or at least someone in their business is who becomes the ‘product owner’, and with SAAS deployments and maintenance is not a problem it once was. Software companies are also becoming better and developing software that is not so hard to use that and 3 day training course is required as part of the sale.

Having sold to a lot of these markets I find the clients often dislike the incumbents and don’t believe they are getting good value at all but haven’t previously had no alternative.

#12

This is why I love this forum! Thanks guys for your meaty discussion.

So lets create context. Im a .NET developer, more specifically a SharePoint Developer and as you may know Microsoft are pushing Office 365 massively of which SharePoint is now a part of.

Nintex (www.nintex.com) is the competitor and they have been providing a workflow bolt on for SharePoint since 2007 (since SharePoint has workflow built in - workflows = business automation - think travel request or expense approvals or employee onboarding). Without much opposition they did $58 million in revenue in 2012 at a profit of $15 million odd. I don’t dispute that they have an army of account executives who service enterprise clients. They provide an easy to use drag and drop workflow editor which makes creating document approvals pretty easy.

HOWEVER:

The market is there (trust me on this - and is growing rapidly!!)

Microsoft is ‘making’ every SMB to large enterprise move to Office365. It makes sense too. Email, user management, Drive (like dropbox for business), SharePoint all rolled into one package for a couple of dollars per user per month. They also get SharePoint, which some of you may know is a document management tool.

Ive worked with SP for over 10 years, trust me the market is MASSIVE. And will become more massive as those SMB clients who previously didnt have SharePoint (because it was/still is an on premise software at an additional cost) now suddenly have this cool document management system.

Im targeting SMB’s who now have the ability streamline processes with workflow but don’t have 15K a year for an easy to use tool

The reason im starting this company. Ive now walked into the 3rd or 4th company and recommended their tool, to which the client has turned around said that theyre not prepared to pay that.

My go-to-market strategy is not a simple one. Whilst I do agree that google adwords may not save me, I have done my keywords research (thanks long-tail pro) - over 4000/month google “sharepoint workflow tool”. Im sure that that will create some leads for me. Its a self service tool… designed for you to automate your own workflow instead of getting a developer in to code/configure you one in SharePoint’s clunky interface. Thats the same as Nintex’s value proposition.

I will also partner with SharePoint partners/consultants/developers who do recommend Nintex to their clients. So yes, that takes manpower, i understand that. I will be presenting my product at local meetup groups for office 365 and conferences. I will provide a revenue stream for partners who recommend my product.

Sure I know thats a hard way to go but if everybody decided it was too much effort, would their be any B2B software out there? Besides the decision makers at the SMB’s are different to Enterprise. They can act faster without the red tape.

Thoughts?

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#13

What does integrating a complicated system has to do with computer-savvy?

People always assume that the big companies are stupid. Sometimes they are, but often there is a good reason why they are paying this much money for something.

If you don’t pay the $15K, that includes integration and possible training, then you need to pay an employee of yours to learn this system and integrate it.

#14

Is there any way you can test demand without first investing in building the tool?

Maybe offering flat rate service at the same price or even 1 day turnaround on converting the work for mockup into working share point.

#15

This reminds me of something Paul Graham wrote in “How to start a Startup”:

In technology, the low end always eats the high end. It’s easier to make an inexpensive product more powerful than to make a powerful product cheaper. So the products that start as cheap, simple options tend to gradually grow more powerful till, like water rising in a room, they squash the “high-end” products against the ceiling.

So if they cannot get cheaper, you can approach clients that would gladly consider cheaper options. You can then build upon that and make your product more powerful step by step. But don’t try to win over existing customers, as others already said here, the cost of them moving might be too high, so don’t rely on that.

#16

I’ve had bad experiences competing on price, and it wasn’t until recently when a friend recommended I read Blue Ocean Strategy, that I was able to grasp why it’s such a bad idea.

To summarize, any customers who would leave an existing vendor for price, will likely leave you too at the drop of a hat. By simply undercutting price, the only thing you’re actually accomplishing is cutting into your own profits in order to steal away your competitors bottom-feeders.

For startups that’s pretty much a nail in the coffin, and it’s especially true if you’re in the SaaS space, because if your customer LTV is not high enough to offset your CAC (and then some) you’re going to hit the wall faster than you can say ‘saas’.

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#17

If the incumbent(s) are firmly in the enterprise market in terms of culture, sales cycle, and pricing, AND if the potential market is much broader than customers addressed by said incumbents, then it may make sense to compete on price. Think Mailchimp vs Epsilon in the email service provider market.

You’ll need to be an order of magnitude or two cheaper, not -20%, to open up a whole new customer segment in that market.

Recommended reading:

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#18

You aren’t necessarily competing with a company that offers a solution similar to yours. You’re probably just catering to a different crowd when you price differently. Case in point: Do you think many shoppers have trouble deciding whether to buy a Ferrari or a Toyota? Both companies make well-constructed vehicles, but they are still aimed at very different types of customers. I would think few people would seriously consider both as a potential purchase.

Feel free to hit me up with questions. I wrote a book on how to price software systems (link in profile).

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