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Pricing a Software Product
prostoalex writes "Eric Sink from SourceGear shares his experience on software pricing. Whether you're developing open-source or proprietary software, the money has to come into the business in some form, and the article suggests several strategies as well as the pitfalls for managing software pricing. Sink claims it's tough to compete on price, dangerous to run seasonal promotions and almost impossible to avoid criticism on being over-priced."
Volume Pricing has its snag in how you handle customer Support. I didn't see that addressed (other than lightly under Tech Support), the higher the volume of sales the more need for customer support. Only so much can be down with a website FAQ. (Personally, I'm wary of products which don't come with printed manuals or a pdf with only a light treatment of the subject matter, back in the day manuals were your saviours, now they're some kind of afterthought that vendors seem uninterested in putting effort into.)
With inexpensive stuff you may lose all your profit on customer support, with pricing of support and/or a higher price nd lower volume there's less need for a large customer support team, or it grows as needed.
Granted, I've worked for people whe shelled big really big zorkmids on stuff and when it turned out to be crap, it wasn't the vendor to blame but headcount.
There's some discomforting truth to many of those Dilbert strips.
A feeling of having made the same mistake before: Deja Foobar
He'd like to believe that the pricing follows that nice bell curve, and that would be true if there weren't a monopoly skewing the graph to nearly a flat line. MS can charge whatever they want up to a point, their demand is inelastic due to their monopoly.
I've had enough abrasive sigs. Kittens are cute and fuzzy.
thanks :)
Unless of course you run a company, and have employees to pay. In that case, you can't always make a living off of service and support.
Tech, life, family, faith: Give me a visit
What dumbass is modding these links down? Maybe if people keep posting them, the editors will get a clue about the heinous IT color scheme.
Hate to be the part of the money-grubbing capitalist here, but money makes the world go 'round. If all software was free, why would anyone bother developing it? I know there are great free software products out there, and I know there are ways to make money off of software other than by selling it, but making all software free really doesn't seem to be a viable option. Let me put it another way...you're a software developer making a product - the final piece of software represents the work you've put in to devloping something unique and useful....how much is this effort worth? Nothing?
...no two people are not on fire.
If you want to sell your product to consumers, you can't really charge an arm and a leg (unless your MS ofcourse). Generally I don't buy any software that runs over $60, OSes excluded ofcourse. Now if you're selling to a business, it varies greatly. For a business, a $600 license for Photoshop is practically a bargain.
Supply side pricing...
I think there is a fundamental problem with supply side pricing in the modern factory driven environment. How do you predict how many copies you're going to sell, and thus manufacture?
If you can produce 3 million copies at $2 each and sell at $3 to make back all your money and then some, vs 3,000 copies at $4 each but need to sell at $999 to make back all your money, what do you do?
Realistically you expect to sell less, and charge slightly more, like $2,000, because it only costs you $12,000 to manufacture, vs $6 million to manufacture. Supply side is a great idea, but only if you can perfectly predict how much demand there will be. Of course there are exceptions, but realistically demand-side pricing seems to work slightly better on the average.
This said from someone who's produced several hundred DVDs and sold at $20 or so each, rather than several thousand at $6 each.
GPL Deconstructed
A good price depends on your target audience.
For the average Joe: $20 or under will get impulse buys ("Not that much if it ends up sucking"); over $50 means they'll only buy it if they already know they want it; Over $250 will only get those who really need it and have done some decent research into alternatives. Over $1000 means you can guarantee that everyone will pirate it without even feeling bad ("At that price, I didn't count as a potential customer anyway").
For teens and older kids, drop those to $5, $20, $50 (yes, the average price of a game) and $100, respectively.
For business customers, the scene changes a bit. A very small business may behave like a somewhat more well-to-do average Joe. Once layers of accountability start appearing, though, the low and high categories vanish - No impulse buys, and no piracy. For that reason, as the business gets bigger, the potential price does as well, almost without limit. Keep in mind that the higher the price, the fewer your potential customer base, though.
In a fair world the price of software would be proportional to the difficulty and cost of its creation as well as its usefulness.
Odd world where Linux is free and Windows is expensive, eh?
LilMikey.com... I'll stop doing it when you sto
The whole idea of trying to take your customers for everything you can sounds so much colder when you look at it from their side.
You aren't taking them for everything you can. You're selling at a price, and it's up to them whether they want to pay it or not. Charge them what they are willing to pay, not more. Some people will complain, but as the author says, some people will always complain.
There's nothing unethical about making money. Making money in a free market is the best proof you could ask for that you are giving people what they want at a price they can afford. Making people happy, is that ethical enough for you?
Yes it takes a lot of work to come up with original ideas. But not so surprisingly you can give away ideas, and most people wouldn't know what to do with them. Then you turn around and charge them to show them how it works. :)
Software, unlike widgets, isn't quite the same. If I make widgets, it will cost me $X for engineering and development, $Y for support, and $Z for each widget coming off the assembly line.
For most products, $X+$Y is $Z on a per-piece basis, so I've got a good baseline for my pricing. If I add 10 or 20% to the widget production costs for R&D&S, then drop 30% for my profit, and double that to get the MSRP, it's fairly straight forward.
For service industries, people are the cost, and its not too hard to determine how much to charge. If you charge by the hour (as many service contracts do), you take your hourly rate, factor it by your G&A and Overhead, add your 30% profit, and bill the client.
For software, your R&D and support outweigh your production costs by an order of magnitude or more. Do you price it at $10 and hope everyone buys a copy, or worry that you'll only sell a few copies to well-heeled clients and mark it up to $10,000? MS has elimiated the support problem by not providing any free support. Of course, that reduces the incentive to get it right the first time, too.
Is it just my observation, or are there way too many stupid people in the world?
Your thinking is flawed.
Let's take an analogy. I have a valuable rare coin worth $1,000. It is taking up space in my house, and I simply found it lying around.
You are a coin collector. Not only do you know it is worth $1,000 on the open market, but you have a particular affinity for it. You would easily pay $2,000 to get your hands on it.
So, if I sell it for $1, are you ripping me off? If I sell it to you for $2,000 (it cost me nothing), am I ripping you off?
You might be tempted to refer to the "market" as the fair price. The market price is nothing more than a value at which you are pretty sure to find a buyer. Higher than that price, you will have to spend time seeking a buyer who places greater than normal value on the thing. Lower than that price and you are basically cheating yourself.
The beauty of capitalism is that it recognizes the basic fact that every person values things uniquely. When we engage in a transaction, we are both more wealthy... even with demand-side pricing. You will never pay more for something than it is worth to you. Anything you pay less means you are wealthier.
Let's take that coin. To you, it is worth $2,000. I sell it to you for $1,500 (above the market value). Before the transaction, you had $1,500 that was worth exactly $1,500 to you. After the transaction, you are down the $1,500. But now you have a coin that is worth $2,000 to you!
As for me, I had a coin that was basically worth nothing to me without knowledge of the market (or worth $1,000 with knowledge of the market). After the transaction, I have $1,500 in cash! BOTH OF US make a profit.
Another flaw in your question is that costs are easy to quantify. In fact, in software development, they are hard to quantify. How much, exactly, does a download of Photoshop from the Adobe web site cost Adobe?
What happens if you have to begin charging for the product itself because it is no longer feasible to offer it for free. I know I am instantly turned off by a product that was once free and has grown so large or its market share increased that they turn to charging a price, even if it is essentially the same price.
This should become interesting as Free software matures and becomes viable products for the common man (please dont flame on "there already viable")
"So, instead of charging for the software, charge for the hosting. Develop and open source the product, then charge people to use the service in your hosted environment."
Or keep the software closed and charge for usage.
Open sourcing it simply means that someone else can host the same thing, and undercut you. Remember nowere is it written that you have to help your competition. Nor are you even obligated in creating one.
One of the problems with this pricing model is that it doesn't take reputation into account. People know that MS Access will work with Windows XP. There might be a few bugs, and there might be a few issues, but for the most part it is stable and people know how to use it. Now imagine that a new software comes out. It's producers try to show that it's better than MS Access by pricing it $100 above Access per license. What they haven't taken into account is that people KNOW Access. They know how to make it work. Will people pay $100 more (per license) for something that is unsure? Additionally, the $100 per license isn't the only cost associated with the software's implementation. What about training? All the people using access before will now have to learn to use the new software. That can be $very$ $expensive$.
Try eMusic. DRM free, legal, MP3 downloads.
If all software was free, why would anyone bother developing it?
Forget the free part for a moment.
I develop my own software because I can't get what I need either for free *or* for money.
The commercial stuff is often close to useless,
as it's always designed for flash and flare, not
usability or utility. Thank 'Marketing' for that.
I suppose I could get custom work if I offered *enough* money, but why pay out a year's income for something which might take me a day or two, or
a week, to do myself?
>we asked our customers
I really like the common sense straightforwdness of that idea.
do you think they were being truthful?
(not a rhetorical question)
from a game theory kind of view, giving away that kind of information is like giving away money.
like if are going to buy a car, I've read about this method of price negotiaion and maybe one day I'll have the balls to try it:
You tell the salesman that you are both going to write down a number on a piece of paper. You are going to write down the absolute highest price you would pay, and he is going to write down the absolute lowest price he hill accept. If the prices don't intersect, you walk [and you had _better_really_ be prepared to walk]. If they do intersect you will settle on the half-way mark.
Now, he is a proffesional car salesman, so he probably has an advantage on you still, but I think I'd still get screwed a lot worse doing it this way than just walking in and coming under the influence of their sales-guy reality distortion field.
I'm not a money grubbing capitalist- I have to say that to make software that I create free you have to somehow magically provide me with food, clothing, shelter, medical care, water, my MSDN subscription and a net connection.
SJW: a person who perceives an injustice, and while correcting it, commits a greater injustice.
This is the fantasy Open Source business model and it doesn't work. Except when the software is hard to use. But then the business model is "give away crappy software and charge people to actually get it working."
If you want to make money on GOOD software... software that actually empowers people to be self-sufficient, you need to charge for the software.
One other note. It takes vastly different mind sets to develop in a product environment than in a consulting environment. Your best product developers are going to be people you would never throw in front of a client.
Software pricing = (DC + RC + P)/EUS ...where DC = Development Costs, RC = Residual Costs (support, maintenance, etc), P = Profit, and EUS = Expected Unit Sales.
Obviously, if you are selling to a wider audience, the software can be cheaper. This is why niche software like AutoCAD is so expensive.
Life is the leading cause of death in America.
Could you explain your beer-renting metaphor? All the beer I've had in my life has either been free, or bought out-right.
The only thing I can think of is perhaps some crazy conspiracy where beer drinker's urine is captured, bottled, and re-sold (rented). This is certainly not the case in Canada, where all my beer comes from.
I know it's unheard of for the editors to pay attention to anything the readers say, but this really has to change. Some of the other sections may have hideous color schemes but this one is simply unreadable. Days later, I still manually change the URL for every story posted in IT.
What I'm listening to now on Pandora...
Gee, I can't think of anyone who would develop software without getting paid for it...
But seriously, there are several reasons people would write software whose price is 0:
There are lots of motivations for people's actions besides money.
All's true that is mistrusted
" enter it quickly, search it powerfully and associate it meaningfully"
Nice elevator pitch, and I'm not being saracstic. It's rare to find such a good and brief expression of what a product does and why it's the one you should use.
development.lombardi.com
Maybe if people keep posting them, the editors will get a clue about the heinous IT color scheme.
We can but hope, but it didn't do any good for the games section colour scheme...
It's official. Most of you are morons.
Simply follow Microsoft's approach.
Get a monopoly in two important products, e.g., Office and Windows. Charge 80% margins on those products.
Use those huge profits to give away or nearly give away everything else.
If someone says he and his monkey have nothing to hide, they almost certainly do.
Pricing depends on your goal.
If your goal is to maximize profit, that's one thing.
If your goal is to maximize distribution, that's another game altogether.
If your goal is to penetrate a particular niche market but you want the headaches of supporting customers outside that niche, that's another altogether.
If I want mass distribution and can afford to do so, I'll sell it for under $20 or give it away.
If I want niche distribution, I'll research my niche and price accordingly.
If I want to maximize profit, I'll look at the overall market and price where I think I can meet that goal.
There's more to sales than price though. There's your company's reputation, and of course marketing, marketing, and more marketing. But not the overly annoying kind, that typically backfires.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
But I thought there was no censorship on Slashdot! Afterall, the your rights online section has lots of articles criticising censorship by other companies.
At work, while others pass around movies I just can hope that I get ahold of a Windows box to view them in or ultimately go to another's box and take part in the fun.
Windows... it just works. What's the price on sanity? Time? Productivity? Feeling you accomplished what you set out to do instead of repeating the same steps that hundreds of others do all the time merely to get a small part of a piece of a component of your entire system running correctly for 25% of common uses? This is obviously a troll, but truth hurts worse than any natalie portman hot grits down my beowulf clustered pants.
Again, no dis on them Gentoo folk at all. Like any hobby project you have good, bad and great. Gentoo is at the top of the list of hobbies. Meanwhile professionals will continue to track issues using more than forums, emails, and IRC. Hard to be anything but a niche hobby currently.
So how's that 2004 series of LiveCD's working? Want sound? Want 3D graphics? Perhaps playing a movie is what you want?