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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."
...although simpler, I think. Apache 2 comes in at a half million dollars, Tomcat weighs in at $250K.
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Software (actually the entire software and hardware combo as a functional system) is only really worth what it would save you in the time and money it would take to accomplish a particular job in another non-automated way. If doing that job in the manual, non-computerized way would cost you less, then you shouldn't involve computer automation at all. Every businessperson should really do a thorough cost analysis before allowing themselves to become addicted to any software app. Sometimes they'll find a system to be a tremendous time and cost saver, easily worth many times what the actual cost to implement the system and train the end users totals up to. Sometimes they'll find the system to be about as productive and cost beneficial as a heroin addiction.
How much should I charge for my software? http://www.joelonsoftware.com/articles/CamelsandRu bberDuckies.html
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You've just released your latest photo-organizing software. Through some mechanism which will be left as an exercise to the reader, you've managed to actually let people know about it. Maybe you have a popular blog or something. Maybe Walt Mossberg wrote a rave review in the Wall Street Journal.
One of the biggest questions you're going to be asking now is, "How much should I charge for my software?" When you ask the experts they don't seem to know. Pricing is a deep, dark mystery, they tell you. The biggest mistake software companies make is charging too little, so they don't get enough income, and they have to go out of business. An even bigger mistake, yes, even bigger than the biggest mistake, is
And this is an interesting point. I've always been amazed at the dollar figures the BSA gives out for the "value" of "pirated" software, avoiding the fact that a large percentage of these people would not have bought the legitimate copy anyway.
"Who are in control, they are not in control of anything - they don't even control themselves!" - Glen Beck
My contract rate as a QA Lead Tester is between $15 to $20 per hour. That's how much software is worth in Silicon Valley. However, outside of Silicon Valley, I would get $50 to $70 per hour for the same kind of work. Go figure.
You can't charge awefully more than your competition, can you ? If the competition gives it up for free -- then well, all your calculations go awry.
Think about the price of a browser, media player and well, a operating system.
Think Netscape vs IE circa 2000 AD. Now, only a free product could defeat IE.
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This sig is up for free.
Sounds to me as if the way to make valuable open source products is to create a product that is very difficult to setup (thus producing much consulting/support revenue) but very powerful once you've got it going. If you can find something that requires extensive customization you're probably on the right track. Easy to configure products that are readily usable by everyone don't contribute usefully to the open source community's economic well-being (as they'll just be used by non programmers and won't fund any developers by way of support contracts)...Interesting... This suggests that the income proposition for opern source products is almost backwards from that for closed source. A closed source commercial company wants to provide the product pretty much ready to go and doesn't want to provide extensive after sales support. An open source company wants to release products that require extensive support as paid contract work (and this sort of product enriches the entire open source community...at least as long as the end result of the customization is quite valuable)...
avoiding the fact that a large percentage of these people would not have bought the legitimate copy anyway.
Yes, but there's a big difference between that legitimate copy and a legitimate copy. Would someone who pirates Adobe Photoshop with all bells and whistles buy it? Very unlikely. And they do, because if you're going to pirate it anyway, why go for anything but the most powerful and expensive program? But if he could not pirate any graphics program at all, he'd likely buy something. Maybe a lighter Adobe product, Paint Shop Pro, maybe he'd find GIMP or any number of possibilities. But it's not likely he'd stick with MS Paint.
So it is equally wrong to pretend that none of the piracy leads to lost sales. But finding the exact factor would involve some handwaving and a magic number between 0 and 1. Piracy apologists often claims it is 0. BSA claims it is 1. Both are wrong and they know it, but it fits their agenda and it is difficult to say what the factor *really* should be. Good luck in trying.
Kjella
Live today, because you never know what tomorrow brings
TCO of straight lines is up...
I am an Architect, also ex-programmer, and I hate Autodesk's high-cost worth-less products (random right clicking will often generates "Not Implemented" message boxes). Other products use similar fees and pricing, so switching is not an option. Tech support has been outsourced, and is equally, or more worthless.
My "lifetime" contribution to Autodesk will be in excess of $120,000 - for 1 licensed copy of ADT for 25 years. That's not including M$ costs and forced hardware upgrades.
I see OSS as the only way out, and since I don't have the time, I will have to make the $$$ to pay someone else to write a useful CAD application. Too bad my Arch salary is 1/2 of what it used to be.
Sigh. At least there's light at the end of the tunnel.
This raises an excellent point, which I had hoped (considering the title) would be explored in TFA. How much should one charge for software, especially for mission-critical applications? Is it equitable for a developer to charge a portion of the potential benefits? Should the developer set the price of sales based on the cost of initial development (and hence replacement)? Let's explore the issue.
Say I'm contracting for a company (with an option to resell the software later to other companies) who needs a program to assist management in analysing and managing all the facets of their business. The company stands to benefit from this software -- by changing some job descriptions, by managing laborers better, by scheduling operations more efficiently, shipping more product on time, etc. -- on the order of about US$500,000.00 per month.
On the other hand, the company will be required to purchase complimentary services -- Internet connectivity for its office and salespeople, internet plans for many employees' mobile phones, zipcode database subscriptions, etc. -- and complimentary software and will spend a significant number of employee hours bringing the new system into operation.
As an employee, the pricing is simple: write the software in the course of your job. As a contractor or software reseller, should I price the software at the cost of original creation, perhaps on an annual-salary basis? Support services will be offered later, as is expected in the software industry.
What we see is this: There is a huge disparity between the actual cost of producing the software (about 1 year's salary) and the amount one could expect to benefit from it in a reasonable period of time under a recovery model. Say, if the business wanted to recoup their investment in 6 months, they have an upper cap of about $3 million for the software. But, assuming they can find and hire a good developer, they could re-produce the software in about 1 year for less than $100,000.00. (Lost profits would be huge for that time, but we'll leave that out of the picture.)
Any guidance for a fair and ethical pricing model? Are there any accepted formulae for this?
Jasin NataelTrue science means that when you re-evaluate the evidence, you re-evaluate your faith.
I think the corporate line would change if that same person polled were asked about their home machine. My informal poll of home users is that they wouldn't pay 20USD per month to have an assurance policy on their PC, where a technician comes around every month for an hour to check if they have the patches right on their box, and they get phone support for free. I cancelled the service after I had absolutely nobody embrace the idea, including the clients who spend 40 times that much having emergency calls made. With home users, it is more about a sense of, autonomy. The business IT exec who doesn't back up their stuff or have support for their software if a user discovers a bug, an unknown feature or what have you, is an unemployed IT exec. CYA is a way of life in the business world of my experience, except among many small businesses who act more like home users, and even think it is a slam against their competence that they will ever need any support services at all. I fix my own stuff, and so do not have service contracts on any of it. I do know where to look for information if I need it, though. This is not unusual among /.ers, I have noticed.
I like open source because I can make changes lower in the source code (if I want) to more fully differentiate the stuff I work with, and there is not ever a question of infringement. The people I sell services to understand that the license of the software was free and they were paying for me to customize it. I can show a comparison of buying big box software, buying custom coding, and open source. The costs are comparable (if you include maintenance) for an implementation of Reddot or Mambo. They come in different times in the effective life of the software.
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