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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
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.
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
Uh, for Windows you are correct. For office, you're partially correct. But for all of their other programs, Microsoft has direct competition from many sides. Sink even gives an example...where an ISV has created a product that competes with Access built on Open Source technologies.
"So what is the right price range?
This question is the point where most small ISVs will wimp out. "We don't have the Microsoft name." "Our product is less mature." "We feel inferior, so obviously our price has to be lower than theirs."
Bzzzt! Wrong answer. The right answer is: "A lot more than $229."
Basically, Sink is telling ISVs to grow a backbone and realize that the first step isn't competing with Microsoft on price (mostly for the reason you're talking about, MS can just drop the price and thus drop the usefulness of your software) but finding the area in which their product is SUPERIOR to Access and leveraging that.
It's good advice. Because by doing this, you encourage people to move away from Access while at the same time increasing itnerest in your product.
We have a local car dealer who did a commercial claiming that the Hyundai luxury sedan looks "just like" the Jaguar only it costs much less. Needless to say, we laugh our ass off at that commercial. A Hyundai is not a Jaguar only cheaper...it's a Hyundai attempting to LOOK like a Jaguar. Too many low-cost programs suffer from trying to look like a Jaguar, when what they really need to do is analyze what it is about the Jaguar that makes it attractive and what can be gleamed from that and added to that to approach the market from a different direction.
Our company writes software for a saturated niche, but does alright because we look at things from a different perspective. Rather than just allowing our customers to enter and store data with a weak search engine, we allow them to enter it quickly, search it powerfully and associate it meaningfully. Our price is higher for that reason -- and yet we have more customers.
Hey freaks: now you're ju
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.
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?
>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.
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
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.
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.
You completely misunderstood the graph.
#1 The graph is not of a bell curve. It's most likely a parabola.
#2 The graph is of revenue as a function of price, not as demand as a function of price.
#3 If demand were inelastic as you say, Microsoft would be charging $1,000 or $10,000 or $100,000 for their OS.
I think it's more likely that their software is priced to maintain their monopoly.