Calculating the True Worth of Software

chromatic writes "Many people recognize that the cost to duplicate a piece of software is a fraction of the number on its price tag. Many people also understand that software without support and maintenance loses much of its value. Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself? Robert Lefkowitz recently applied an options pricing model to software in ONLamp.com's Calculating the True Price of Software. Don't let the description fool you; it's both a readable and serious apologia of the common free software business model."

Comments

software is worth..

[Anonymous Coward]

..whatever someone is willing to pay for it.

Same as anything else.

Re:software is worth..

[Ezdaloth]

With the difference that you can usually steal software without getting cought if you think it's too expensive. I wonder wether cheaper software would lower copying and/or increase profit?

E.g. at euro 50,- would enough people buy office instead of copying that revenue would increase?

Re:software is worth..

[Metteyya]

...unless there is monopoly or software doesn't have more-or-less equal alternatives (Photoshop, Autocad and so on).

Remember, that basic laws of free market (like the one in parent post) apply to market with equal (or almost equal) products.

If you are an architect and the only really viable piece of soft for you is Autocad, you can't speak of free market here.

Re:software is worth..

[SA Stevens]

Do you really think Windows is worth what Microsoft wants for it?

Isn't that a decision for each Microsoft customer to make? I take it from the tone of your comment that you're not one of said customers.

The previous sentence, BTW, demonstrates that Microsoft is not within a monpolistic market. (and the fact that I'm entering this on a Dell machine with NO Microsoft software on it reinforces that)

The actual price of SW.

[alexhs]

Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself?

Easy, these prices are proportional to the penetration indice of your previous software : a monopoly charge high fees, an outsider small ones.

Worth or cost?

[mccalli]

Headline talks of worth, blurb speaks of cost. As I'm sure the poster is aware, they're not the same thing by a long way.

For example, I run a one-man contracting business. The worth to me of my accounts package is vast, the cost of it miniscule in comparison. And that cost is...one copy of Virtual PC for around £100 I think (I run OS X), one copy of XP for around £170 (retail, used it on a physical PC I no longer have and now it's on the emulator), then around £50 for Quicken UK. I can feel the Free people ganging up on me - I must be mad! That adds up to £230, that's nearly the price of a low-end machine! Well, to me that software is worth the amount, and the price is an utterly negligible amount of the cost of running my business.

Cheers,
Ian

Re:Worth or cost?

[xenocide2]

The whole article hinges on the financial and economic theory that cost (ie price) is an indicator of worth. The difference between the two is called consumer surplus, and in theory businesses attempt to "capture" that surplus by attempting to charge you more for it. In markets where we can't charge specific customers exactly what they're willing to pay, the price is simply the one that maximizes revenue. Not that there's any way to really know which price maximizes revenue.

Also, consider your alternative: hiring an outside accountant to handle your books. Surely he would cost less than the worth you're implying. And surely he costs more than 230 pounds plus the headaches of managing an emulator and finances by yourself.

I suspect that there's several things that you couldn't do your business without. The article's point is that they all come together, and you can't say that each one is equal in value to the revenue you make.

Of course, software generally does break one of the foundational rules of economics: scarcity. At least, on the margin, software is essentially not scarce. Or at least, not 30 percent margins like they earn. Copyright law drives the high margins on software. Whether this is good or bad seems to depend a great deal on whether you're an american or not. I suspect an even stronger indicator would be whether you own stock in MS or Oracle or IBM or not.

To me..

[riflemann]

The price of software is whatever value it adds to my business, or personally it's whatever I'm willing to pay for whatever convenience it offers (after all, software is 90% "convenience" for personal use)

If I were a doctor, a full medial records + billing application would be worth many thousands (or equivalent of support services for free software). If I am running a bakery, then inventory software is worth far less.

As a hobbyist, software related to my hobby would be worth more than some random game to play with once in a while - if I'm a gamer, that game is worth a lot more than the same hobbyist values it.

Re:To me..

[Rosco P. Coltrane]

I fool around with Adobe Premiere Pro sometimes (To be honest here--I did not buy it). I use it to produce fan videos for EVE Online, but thats about it. To me, it isn't worth much, nowhere near the 800 dollar price tag.

What a strange way of thinking. It's like saying "hey, I drive a Ferrari from time to time, but I really don't use it all that much, therefore it's not worth X million dollars, so I stole it".

Tell you what: in a normal world, if Adobe Premiere Pro isn't worth 800 to you, you don't buy it, and you certainly don't steal it. Period.

I too downloaded a couple of software I don't want to pay (AutoCAD, chiefly), because there was no good free alternative, but I don't find myself half-assed excuses. I stole them, that's all. I'm not saying it's right, or moral, but that's what I did. Can't you look facts in the eyes yourself?

Re:To me..

[bnenning]

Tell you what: in a normal world, if Adobe Premiere Pro isn't worth 800 to you, you don't buy it, and you certainly don't steal it. Period.

I'm disappointed at how many people here go along with the BSA/**AA line. Duplication is not theft. It may be illegal, and it may be wrong, but there is a clear difference.

Re:To me..

[adam872]

When talking about stuff like this, you get into the world of cost-plus versus value based pricing. The cost-plus pricing, as you alluded to, is based on the question: "how much does it cost me to engineer this widget, plus the cost of supporting it over time?". You calculate that cost and add markup to it to calculate the price you will charge. In a competitve market place, you will be under pressure to lower prices to win business, which eats into your margin. So you are then left with either reducing your engineering costs or accepting lower margins. That is, unless you are cheaper than your competition and then you get to preserve your margins.

The other way to do it is to work out how much value this widget creates for the customer. You ask yourself the question: "how much will this widget do one of: lower operational cost, increase productivity, enable new opportunities or reduce risk?". If the numbers are substantial, you charge a proportion of that value as your price (you better be able to demonstrate that, otherwise noone will buy it). In my experience, value based pricing is higher than cost-plus.

Which way you go depends on how much of a commodity your product is. For stuff that anyone can make, you have little chance of using the value based model, given a high rate of competition. For highly specialised areas, the opportunity is greater. However, most widgets become commodities in the end. Engineering practices become more efficient and the market widens for all but the most specialised of products (thereby increasing the volume but often lowering the price). You also have other players moving into the market and spotting an inefficiency they can exploit by being more efficient etc (Dell are the classic example of this).

The firm I work for wrestles with this choice daily. Our tools are very specialised and often create enormous value for the customer (last week, one tool saved the customer over USD 1M, but we charged a fraction of that and still made excellent money). At the same time, the market is competitve, preventing massive price hikes.

In terms of your question: I don't think there is an ethical paradox here. You simply decide which of the models you can use and charge accordingly. Assuming you are not in a monopoly situation, the free market will tell you if you are right or wrong with the pricing. I do, however, think that in a monopoly situation, the potential for market distortion and underhand dealings by suppliers becomes almost a certainty.

Linux

[daviq]

"Many people also understand that software without support...loses much of its value." So then Linux has nothing to lose!

Cost vs value

[Anonymous Coward]

Many people recognize that the cost to duplicate a piece of software is a fraction of the number on its price tag. Many people also understand that software without support and maintenance loses much of its value. Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself?

Of course there is. Cost and value are two different concepts. Something can cost nothing, yet be very valuable (e.g. Apache).

Pricing things like support is merely the exercise of coming up with a price that is low enough to find people who value it more than the price, while still being higher than the cost to provide it.

The cost to provide support includes things like employing people who know all about the software.

The value to the customers is that they can rely on the software and get problems sorted more quickly without having to employ their own experts.

Neither of these bears any relation to the cost of the software itself. It can be free, or it can cost thousands, the principle is the same.

There is a difference between Free Software and proprietary software though; with Free Software, you can get support from a number of competing firms, and with proprietary software, you are limited to the original vendor. Free Software support has the advantages and disadvantages of capitalism, proprietary software support does not.

this just in:

[sum.zero]

value is subjective.

sum.zero

Harder to say

[SamShazaam]

As computers become more common it becomes harder to say. How much is a letter of the alphabet worth to you? How much is a common tool, such as a screwdriver, worth to you? Imagine if you could be denied the use of these though Intellectual Property laws.

Re:I keep hearing it...

[Anonymous Coward]

Many people also understand that software without support and maintenance loses much of its value.

Many people have also found out the hard way that
meaningful support is non-existent.
I have never, not even once, gotten the correct
solution to a problem with commercial s/w.

Generally, after some sweat, I've been able to create a work-around or discover the solution on
my own.

So, here's one place I can't say you get what you
pay for.

Re:Price of Tetris

[Kjella]

Since you start with another game: 25 cents, I assume this is the abridged edition?

One of the great things about software

[ShatteredDream]

Is that most of the cost that goes into developing it is in the labor. The only problem that companies like Microsoft face is that their shareholders have gotten addicted to the high profit margins that have dominated for so long in the commodity software market. Realistically, Microsoft could afford to cut the cost of Windows from $100 per upgrade disk to $50 a copy and from $200 for the full version to $75-$100 if they wanted to become more aggressive. Office could see similar price reductions, and in fact such a major price reduction might be enough to cause a lot of buyers to just say what the hell and buy the software even if they don't REALLY need to upgrade.

If companies like Microsoft really want to rake in the cash on support and upgrades, they need to make them cheap and exploit economies of scale. It'd be a lot easier to convince many companies to buy a support contract that costs $5-10/machine/month for support and upgrades than make them pay $250 for an upgrade every two years. With that monthly fee, the company gets seemless upgrades and Microsoft gets a guaranteed revenue stream from them.

Re:Joel on Software on the same topic

[MBCook]

Very little ($20?). That's my answer. Here is why.

People fall into three groups by and large. Here is what each will pay and why.

1. Mac People - They have iPhoto, or can buy iPhoto (as part of iLife) at a great value. That is an AMAZING piece of software. Good luck getting people to switch off it.
2. Windows People - They have Picasa. It's the closest thing on Windows to iPhoto. It's not as great, but is fantastic compared to everything else out there I've seen. It's made by Google and is FREE. Good luck getting people to buy your product.
3. Linux People - They want it free. Free OS, free software. Some will pay, but many will just use some OSS photo organizer and be happy with it because it's free. Not to start something, just my observations.

All that said I agree that pricing is a major mystery. Just a little too high and no one would touch it. A little too low and people will buy it, but as the blurb in the parent post states, you could have made much more money.

And then there are other cases. Like when I went from a PC to a Mac I purchased a little program for about $20 to turn my Outlook e-mail into something Mail.app could import. I HATED paying $20 for it, and I avoided it as long as I could. But after two days of fighting every free way I could, I bought the program and was glad I did (and wished I would have done it sooner). Had it cost less, I would have bought it sooner, but then they wouldn't have gotten much money ($5 probably would have done it). You also get things like TiVo. People balk at that (Why should I pay $12 a month for what I can get for free with my VCR?), but as a TiVo user I would gladly pay double that if they were going under at the current price. But how much trouble would they have selling them with a $25 per month subscription?

The only people who have it right are MS. They charge a ton, get a ton of money, and everyone is locked into (or at least thinks they are locked into) their software so they pay it. Everyone hates it, but most people don't do anything about it.

Re:What the competition is charging ?

[Anonymous Coward]

Last time I checked Gmail didn't only work with some Google browser. I also can't remember Google inventing some half-assed standards and forcing them on people.

Piracy hurts OSS.

[Anonymous Coward]

Actually one could say that piracy hurts OSS. Why? Because it gives an individual one of the benefits of OSS (zero price) with the benefits of proprietary software (ease of use, familiarity, etc, etc). Why try the GIMP, or Apache, or any of the other OSS software when you can get the paid software for free?

Besides piracy also leads to market dilution, and various image problems. e.g A pirate copy of Adobe Photoshop could have spyware. Potentially ruining Adobe's reputation in the market.

Writing it Yourself

[yintercept]

The theory of labor would set the price of software somewhere below the cost of writing the software yourself.

With a good OSS layer available, the cost of "writing software" should be going down...which might be why big software companies nervous.

Re:What the competition is charging ?

[fermion]

Ah, this is interesting. I have been using browsers, media players, and operating systems for many years. I have never directly paid to use the former two. It was either a free download(perhaps FTP) or came with the machine. The later I have directly paid to add to a machine once in my life. It was CP/M. Otherwise it came with the machine or was an inexpensive upgrade.

What we learn from this is that utility, or operating, components are not so valuable in themselves. We buy a complete car, not a chasis, engine, and then oh, we need some way to control it.

But in the end the value of a product is not measured in resources consumed, but in what people, either the end user or advertiser or whoever, will pay to use it. Of course, if the value is not greater than the billable resources consumed, then the company will suffer, and if the value is not greater than all resources consumed, then society suffers.

MS continues to use IE as the carrot to keep people on widows. It value is soley to MS as a monopolistic tool. This is why it has been and will continue to be free, and why they are increasingly limiting the upgrade path.