While from an engineer's perspective it seems distasteful to do this, from a business perspective it can absolutely make sense.
Low-cost leader can certainly be a sustainable competitive advantage. Think GEICO vs. All State.
A lot depends on the service you are looking at, but I think it's important that low-cost be part of your marketing. Advertise the fact that people shouldn't be "paying for features they don't need" or support they don't need. If you are clear up front that you are cheap for these reasons (and are not afraid to fire customers, or at least tell the more difficult ones they should be using the more expensive service), you can sustain that lead.
Be careful, though. You need to think about why your competitor is able to charge more.
An illustrative example is a program called "Final Draft". They make screenwriting software and have been around a long time. Years ago I was curious after hearing the owner discuss how much they sold, how is this company that makes a niche product able to do so much business? How many active screenwriters could there possibly be?
The answer, I realized, is that their business is not made from working screenwriters, it's made from aspiring screenwriters. Every wannabe knows that the pros use Final Draft, so if you wanna pretend to be a pro, you're gonna spend the $100 to get Final Draft so you can feel fancy. This is an awesome advantage for them, and it means I would have a hard time writing a clone and selling it for even $10. The actual software doesn't matter! It's the feelings it gives.
There are tons of products in the Internet Marketing world that have a similar advantage. If your favorite blogger uses it, you feel like a bigshot so you'll pay up for tons of stuff you don't need as s small-timer.
On the other hand, they may just be charging more because they have hired too many people or are being greedy. Up to you to figure this out.
GEICO isn't really a "low cost leader" (even if they are lower cost in many instances) - they are where they are because of marketing. Something you might want to remember if you're going to get into the SAAS business yourself.
> Low-cost leader can certainly be a sustainable competitive advantage. Think GEICO vs. All State.
That makes my point even more dramatically, that being the low-cost leader doesn't have to be a race to the bottom if you have some structural advantage. That it can last. Startup or not is irrelevant.
Yes but OP is talking about building from scratch AND being a low-cost leader. GEICO over the years has pivoted (they originally started as Government Employees Insurance COmpany) and they had the advantage of the business and resources they had already built up. Today, they're owned by Berkshire Hathaway. They spend millions on marketing. So yeah, some serious structural advantage that's irrelevant to OP.
The structural advantage is that they sell directly. They don't use the intermediate agencies who are collecting commissions. That, combined with specifically going after certain customers (originally govt. employees, as you pointed out), allows them to undercut their competitors like All State.
But not just undercut, undercut in a way that All State cannot match. The last part is key, and what makes it a long-lasting competitive advantage.
To bring it back to OP. If their competitor has built-in high costs, there is an opportunity here. That's why I said at the end they need to figure this out. If the competitor just has fat margins then they can easily cut prices, but if they have some high headcount, or maybe some legacy stuff that costs a lot, then can't match the low price without losing money.
Low-cost leader can certainly be a sustainable competitive advantage. Think GEICO vs. All State.
A lot depends on the service you are looking at, but I think it's important that low-cost be part of your marketing. Advertise the fact that people shouldn't be "paying for features they don't need" or support they don't need. If you are clear up front that you are cheap for these reasons (and are not afraid to fire customers, or at least tell the more difficult ones they should be using the more expensive service), you can sustain that lead.
Be careful, though. You need to think about why your competitor is able to charge more.
An illustrative example is a program called "Final Draft". They make screenwriting software and have been around a long time. Years ago I was curious after hearing the owner discuss how much they sold, how is this company that makes a niche product able to do so much business? How many active screenwriters could there possibly be?
The answer, I realized, is that their business is not made from working screenwriters, it's made from aspiring screenwriters. Every wannabe knows that the pros use Final Draft, so if you wanna pretend to be a pro, you're gonna spend the $100 to get Final Draft so you can feel fancy. This is an awesome advantage for them, and it means I would have a hard time writing a clone and selling it for even $10. The actual software doesn't matter! It's the feelings it gives.
There are tons of products in the Internet Marketing world that have a similar advantage. If your favorite blogger uses it, you feel like a bigshot so you'll pay up for tons of stuff you don't need as s small-timer.
On the other hand, they may just be charging more because they have hired too many people or are being greedy. Up to you to figure this out.