Ask HN: Pricing models, stand-alone software vs. enterprise what works?

My company is currently (or should I say typically) reviewing pricing for our product. We're too small to compete against our largest (and much more successful) competitor directly, but we've historically priced to stay about 20% below them. They gear their offering as an enterprise rollout typically costing in the millions, while we pitch to stand-alone users. Obviously it's hard to compete well in this arena.

We're looking at repositioning ourselves towards the other end of the market, against other stand-alone vendors. But our pricing is about 2x theirs even though we offer about 2x the features. There are many more vendors in this space, and one defacto standard vendor that looks to be on its way out.

We've gained pretty good traction in both areas, but we feel we're getting close to maximizing this "in-between market areas" space and want to expand. It's obvious to us right now, with the way the market is, that competing against our enterprise competitor more directly will just result in us getting squashed like a bug (they don't do very many acquisitions and out technology wouldn't integrate easily into their portfolio anyways). So it looks like we'll be fighting down market.

Since we're priced well over those competitors, we have three choices.

1) Pitch what we have, and hope our feature delta carries the day. We have evidence though that we've lost a few bids to cheaper, but less capable competitors.

2) Lower the price on what we have to directly compete. But we risk cases where we might have made $100 to instead make $50 without guaranteeing at least a 200% increase in sales to make up the difference. Plus the perceived "premium" value for our product potentially goes out the window and we end up head to head against the wrong competitors.

3) Build a new "lite" version of the software (for minimal effort, just turn off some features) and sell that as a new SKU. This helps us directly compete down market, while still being able to offer a flagship to our upmarket folks. This is the option that currently has the most traction. But it risks the same problems as option 2, while also increasing the complexity of our offerings (and all the stuff that goes with that).

Anybody have experience with this kind of thing? How'd it work out? Any tips, ideas?

(sorry I can't talk directly about my company or the space we're in, it might make sense to model us like an MS-Office competitor. Except that the large enterprise competitor is Google Docs, and we are also competing against MS-Office, iWorks, Star Office, Open Office etc. and everybody charges for their software...there's no advertising revenue in our space. The competitive landscape is almost exactly like that.)