Quality, Pricing, and Release Time: Optimal Market Entry Strategy for New Software-as-a-Service Vendors

As a new software licensing model, software-as-a-service (SaaS) is gaining tremendous popularity across the globe. In this study, we investigate the competition between a new entrant and an incumbent in a SaaS market, and derive the optimal market entry strategy for the new entrant. One interesting finding is that, when the new entrant’s product is fully compatible with that of the incumbent, but has a significantly lower quality, the new entrant should adopt an instant-release strategy, i.e., releasing its product at the start of the planning horizon. If the initial quality gap of the two products is small, the new entrant is better off adopting a late-release strategy, i.e., deferring the release of the new product until its quality surpasses that of the existing product. When the two competing products are partially compatible, in addition to instant-release and late-release, an early-release strategy, i.e., spending some time improving the quality of the new product but releasing it before its quality reaches that of the existing product, can also be optimal. Furthermore, under full product compatibility, higher quality leads to higher price for the new product, whereas under partial product compatibility, higher quality does not always go in tandem with higher price.