What is SaaS Predatory Pricing?

SaaS vendors sometimes implement subscription pricing strategies that consider long-term financial outcomes, on occasion resulting in price points below the break-even level, an approach linked to market structure and competitive factors. 

Following competitor departures, the SaaS business adjusts pricing, which may affect its market position and address prior financial outcomes. Understanding this notion will help founders, execs, and lawyers differentiate between legitimate competition in the market and illegal market manipulation.

The implementation of a sustained deep discounting approach can result in alterations to market dynamics and modify conventional competition assessments, influencing the competition similarly:

• This practice involves pricing software-as-a-service offerings at a “point below the average” variable cost of hosting, supporting, and marketing to customers.
• Having access to substantial venture capital funds or a highly profitable secondary business unit that can support long-term losses.
• The implementation of reduced prices occurs in specific local areas and market segments (where competitor businesses are operating).
• Internal planning includes the consideration of adjusting subscription prices upon the completion of market consolidation.

The assessment of a software company’s pricing policy concerning potential antitrust law infringements involves specific legal criteria. The enforcement agencies have two major benchmarks they use to decide that low prices have gone beyond the point of legality.

When software companies encounter competitor pricing that is not sustainable for direct matching, alternative methods for strategy implementation warrant consideration.

• One method is to bundle the main software product with extra add-ons, analytics tools, or better support possibilities.
• The development of integrations with close ties to a customer’s core workflows might necessitate more extensive data migration processes.
• Focus on niche features or specific vertical markets, as these areas often present challenges for generic, lower-cost software.

Here are three self-assessment questions that can be your guide:

1. Has a venture-backed competitor marketing a comparable software product priced in a way that deviates from standard unit economics?
2. Does your software system have the capability to support its existing users if another instrument comes out with a permanent free tier?
3. Is your business’s financial structure prepared for a prolonged duration of adjusted profit margins?

In established industrial structures, certain SaaS pricing practices are related to shifts in market concentration, particularly where physical infrastructure presents operational difficulties for new entrants. In the software realm, this approach does not typically persist. One factor to consider is that notable price adjustments by a leading SaaS provider may be followed by the entry of new venture-backed startups, potentially influenced by the prospect of high profit margins.