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."

Comments

better colors

[Anonymous Coward]

better color

Re:better colors

[Anonymous Coward]

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.

Re:better colors

[Otter]

Also, is my memory faulty or didn't the "The Almighty Buck" logo used to be green, not it.slashdot.org beige? Is Blinding Beige the hot color for this season?

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.

Re:better colors

[5m477m4n]

I thought the colors were in support of our troops in Iraq? They seem to be of the same desert cammo. Other wise they'd be just plain annoying.

Re:better colors

[strictfoo]

being a subscriber might give the complaint more weight, as well.

Well, my other account is a subscriber. But considering that when I posted a complaint about it both the IP's I post from (home and work) were banned from posting anything and my karma quickly going from the good/excellent threshold to terrible, I'd say that it doesn't carry any extra weight at all. I had been a constant subscriber since subscription had become available too.

Thank goodness for proxies, I guess.

Looka These Hyar Charts

[ackthpt]

Whee! Econ, one of my favorite subjects =)

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.

Re:Looka These Hyar Charts

[clifyt]

Generally with volume pricing, it is expected there will be some climate of internal user support at the company you are selling it to.

For instance, at my employer, I have no less that 5 technical lists that I have to be signed up to for the support of specific packages we use (and a few dozen outside of that lest anyone think I'm a slacker :)

We generally try to find the solutions to the problems as a group before calling in the big guns...generally we have a higher level of tech support off the bat than the standard idiot reading from a script, but only a few of us access it.

So it *IS* more efficient for a company to offer volume pricing than it is to sell to every joe on the street that demands to talk to the president of the company each and every time he feels that reading the manual is out of reach for him and an online FAQ? You gotta be kidding. No one on one support is MUCH harder than volume groups because we can help each other...

Re:Looka These Hyar Charts

[RAMMS EIN]

``back in the day manuals were your saviours, now they're some kind of afterthought that vendors seem uninterested in putting effort into.''

and back in the day, the product they came with was sold at a very high price. Now, the product does much more in less time, is widely known and used, and is sold for less than "back in the day", because otherwise customers will go to a competitor. Even if products do come with a manual, customers won't read it and they will still expect you to help them. Manuals have to be translated in every language your customers might speak. In short, making good manuals means spending a lot of money on something utterly unrewarding.

Value for service

[Nos.]

Sometimes I place more value on the service I get that on the product itself (software or not). A lot of software is moving to a hosted environment, and a lot of companies are starting to like the idea. Now you can use your service from your mobile device as well as at the office. 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.

Supply-side pricing???

[dmayle]

What I want to know is, whatever happened to supply-side pricing. You know, figuring out your cost to supply, and charging a reasonable markup based on that?

It's because of this that companies have to create artificial market distinctions, and why there is the prevalance of after-market modification. (Things like overclocking.)

I know it's a bit of an anti-establishment thought, but I'm not sure demand-side pricing is ethical. 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.

And on taop of that, if you're a publicly owned company, not doing so might be considered criminal...

Re:Supply-side pricing???

[2nd Post!]

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.

Re:Supply-side pricing???

[Overzeetop]

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.

Re:Supply-side pricing???

[smack.addict]

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?

Re:The correct pricing structure for most software

[Swamii]

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.

Ask the customers!

[notthepainter]

Ok, it sounds weird, but when I was at MacSpeech, we asked our customers how much they would pay for the product. This isn't as odd as it sounds, at the time there were NO competitors.

It was then a simple matter in Excel to figure out how to maximize our income, at what price point did we make the most money. It looked pretty much like the first chart in the article.

Then management ignores and sets a price accordingly!

Re:Ask the customers!

[chanceH]

>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.

Re:The correct pricing structure for most software

[cecille]

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?

In other words...

[ElForesto]

Pricing software is more complex than my human brain can handle. There's a stunning conclusion.

Seriously, though, he makes a lot of very good points cheif of which is asking "how much is too much?" The author also makes a good point about not selling your product for much less than its actual worth. I'm more than happy to pay a premium on a product if I think it's valuable to what I do and it has a distinct advantage over competing solutions. (Case in point, I donated $100 for Trillian before Pro was released. Why? Because I used it every day and it was much better than any of the individual IM clients.)

It's hard to really draw a line in the sand about pricing, though. I think that's the greater point to be made.

Im gonna be rich

[Aceto3for5]

So how should I price Hello World? I just wrote it in C.

Hmm, competition? No competition! You can find some software books that show you how to make your OWN Hello World, but who has time for that?

Some of those books cost 100 Dollars or more... So that I dont look like an "underdog" im gonna charge $250 dollars. Even better, I could convert Hello World, into Hello World for Workgroups, change the font to something a little more professional, and sell it for $325 plus maintenance and security fees.

Re:The correct pricing structure for most software

[maxchaote]

Service, support, advertising, publicity, and brand-name recognition, for starters. By giving away software for free you are reducing one of the biggest barriers to entry in your market. Those who charge money for a similar product cannot compete, except by their own brand recognition and goodwill. By making a product that is sufficiently well-known you make a name for yourself which supports your business in other regards: winning development contracts, consultation, and hits to your web-site, which can be monetized with internet advertising for what can sometimes be surprisingly lucrative sums. Noone would use Internet Explorer if they had to pay a fee to go download and use the newest version each year.

Re:heh

[dasmegabyte]

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.

Why not just *ask* potential customers?

[pla]

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.

Re:The correct pricing structure for most software

[MindStalker]

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. :)

Re:The correct pricing structure for most software

[Marxist Hacker 42]

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.

Re:The correct pricing structure for most software

[smack.addict]

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 simplified

[swordboy]

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.

Re:The correct pricing structure for most software

[Theatetus]

If all software was free, why would anyone bother developing it?

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:

• People want better software to do $WHATEVER (for values of $WHATEVER that make money, which is most of them), so they write it
• People want to get a job as a programmer so they write a software package to prove they aren't total code monkeys
• People like fame; they like being admired and appreciated
• An industry consortium decides they need an open, standard, free way to do $WHATEVER
• Some people have a political motivation to undermine proprietary software (we may not have that same motivation; but it is a real driving force for some people)
• Some people like to help others (ditto)
• Your company might want to make your product universally (or nearly so) used in order to be able to charge money for training, certification, etc.
• I mentioned 15 high-profile products that are competitive with best-of-breed and are available for $0 (and not all of it is Free as in speech). All of them were written because one of the above bullet points (or one I forgot) applied.

There are lots of motivations for people's actions besides money.

Psychology (humans are fucking insane)

[jafac]

I used to work on a server data replication product.

There are many tales to tell about this debacle (I think the vendor has long since cancelled or put it on maintenance mode) - but there was a point where we raised our price from $250/server to $5000/server, and the ONLY change in the product was a name change. No new features were added. Hell, we didn't even update the GUI. Saled jumped 20% that quarter. (unfortunately it was not to be sustained).

The reasoning was, the Market didn't take us seriously at $250/server because all of our competitors were priced in the $5000/server range.

My favorite "software pricing" story

[maiden_taiwan]

An oldie but a goodie (and humorous too) from Chuck McManis on software pricing for the little guy.

Pricing

[vurg]

I always begin with putting a $1 paypal donation link just right beside the "Download Now" button. The download button actually increments a counter..no wait...it actually creates a text file on the web folder as I find programming with databases too complicated. The text file contains the IP address, agent string, and the datetime stamp. When the number of text files reaches 100, I query the text files and match the IP addresses with geographic locations. If the location is in India, China, or Glxbltistan the file is immediately sent to the trash. This process is performed over time until the number of "good" text files is over 100. When that happens, I increase the the paypal link to $5.

The whole scheme is repeated while increasing the good text file quote by 100. When the donation link reaches $20, I hire some people from India, China, or Glxbltistan (via MSN messenger) to do some more serious marketing and probably maintain some parts of my product code or maybe add plugins for it which I can sell for $15.

Pricing depends on a lot of things

[davidwr]

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.

MyEclipse vs. Eclipse vs. Visual Studio

[jfsather]

I think it would be interesting to look at the price
and sales of something like Eclipse vs. VisualStudio. Then if you throw MyEclipse into the mix and see how they do vs. Eclipse. MyEclipse costs about $30 and I have had no problems getting that approved from any company I've contracted for. They've even been so impressed they dropped their other IDEs and moved most of the developers over. Is $30 the right price for an IDE? Is free? Eclipse, as great as it is, can be a bit of a pain to integrate the various plugins you need to do real development. I have no problem paying $30 for that. I even bought my own copy to use at home because I like it so much.

On the flip side you have Visual Studio. That seems a bit much for an IDE. Luckily, the company I work for is also MSDN, so it isn't that much for me to get it. If I went into a company and told them I needed a copy of Visual Studio and it would cost them about $1500, I think some might not be too happy. Heck, I could probably get some places to drop MS for Java on server side development based on that cost differential alone.

It seems like the same thing is starting to happen on the Office front now--Star is cheap and Open is free and places are just starting to realize that maybe this is exactly how MS sets prices. It can't compete on cost so it ups the price to make people think it is better. Funny, but I think more and more CIO/CFOs are starting to see this.

Re:MyEclipse vs. Eclipse vs. Visual Studio

[slyckshoes]

Heck, I could probably get some places to drop MS for Java on server side development based on that cost differential alone.

Having used Eclipse, MyEclipse, and VS, I agree with your views for the most part. However, with the recent release of the J2EE tools for Eclipse through the Web Tools Platform project I think that MyEclipse may take a hit. Go here to get started with the IBM contribution (basically the useful parts of WSAD) or here for the Lomboz contribution (not as good IMHO).

Re:Reputation

[Overzeetop]

Yes, but if you price your software at a low value then the cost to retrain everyone looks even worse. Which proposal will your PHB prefer to take to the CEO:

Scenerio One:
PHB "I'd like to buy a new database with five licenses for $699. It will help our productivity incrase and reduce crashes"
CEO "What about retraining?"
PHB "For all six users, $5,000, including downtime"

Scenereo Two:
PHB "I'd like to buy a new database with five lecenses for $18,500. It will help our productivity incrase and reduce crashes"
CEO "What about retraining?"
PHB "For all six users, $5,000, including downtime"

Given the two options, most CEOs (who know even less about IT than PHBs) will question the investment of $5,000 in training for a $700 product. For $700, how good can it be? But $18,500 for the licenses seems about in line with $5000 in training. Its all psychology.

Oddly enough, there's a program I want which has a pricing scheme that just doens't sit well with me. It's $1200 for the first license, and five licenses are $1995. As a small shop, I see that as an $800 "litte guy" surcharge, so I've not bought it. I have a (free) vendor sponsored copy that's old and I'd like to upgrade, but not for that kind of money. It's a nice program, but not that nice.

Joel Spolsky's view

[General_Corto]

Joel Spolsky (of Joel On Software) published his views on software pricing a little while ago too. Worth a look to see how someone else thinks about the topic.

Duh!

[Brandybuck]

How do you price software? The same way you price any other product. Duh!

This isn't rocket science, people. If your total revenue drops when you raise/lower your price, then lower/raise your price. Do a bit of market research to narrow in on the correct price. If sales don't work, don't have sales.

Software is a product just like any other, so don't go throwing our all of your sales and marketing knowledge because your not selling forks and spoons. Some of the details will be different, but most of it will be the same. If your product is Open Source, you're probably going to have to sell it at a low price. If it's proprietary software for a niche market with no competition then you can charge a lot more.

Re:heh

[mc6809e]

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.