To Lead or to Follow? Market Entry and Pricing Strategies for SaaS Provider

Abstract

Software as a service (SaaS) is becoming an attractive alternative to the on-premises software, due to its distinct advantage of lower implementation cost over traditional software. However, as an early entrant in the industry, the on-premises software provider has potential to retain its market share by locking in its customers with high switching costs. We incorporate consumer heterogeneous cost sensitivity into the game-theoretical model of a duopoly with sequential entry. We investigate the market equilibrium in price-setting strategies and characterize the conditions under which one provider acts as leader and the other acts as follower and under which both providers adopt simultaneous-move strategy. We find that it is not always optimal for the providers to set prices simultaneously. In a low switching cost environment, the unique equilibrium is the incumbent being leader and later entrant SaaS provider being follower. If the switching cost is in the middle range, the simultaneous-move strategy is dominated and the incumbent-follower/entrant-leader situation represents the unique Nash equilibrium, which results in a Stackelberg equilibrium in prices. In a high switching cost environment, it is never a good choice for the SaaS provider to be leader. Our finding also suggests that the SaaS provider should act as follower instead of leader if it expects to gain a market-share advantage.