I think it depends a lot on the market you're going after. If your market is price-sensitive, either because you're selling to consumers or because you're sell

I think it depends a lot on the market you're going after. If your market is price-sensitive, either because you're selling to consumers or because you're selling to small businesses who are usually stingier, then competing on price can work, and to the extent that you can be the product that these guys get compared to you may be able to ride their coat tails as they spend on marketing the category. If your market is not cost-sensitive, consider open sourcing your software and then selling consulting services for it; your customers may even contribute patches back. This will probably set a ceiling for how successful you can be since contracts will naturally top out at some value because companies can always take your open source code, but it may let you compete. There are probably other strategies if you want to compete, but realise that you will have to compete and you will have to tailor your strategy to you customers.