Pricing Software - Some Considerations and Techniques

[40hz]

A few weeks ago, fellow DC member mwb1100 introduced the forum to a software pricing concept and philosophy called Fairware. It provoked some interesting comments and debate from the membership. Of especial value was when Fairware's originator (and now DoCo Honorary Member ) hsoft joined the discussion to clarify certain points and address questions some of us had.

While the Fairware discussion is ongoing, I thought it might be beneficial to take a look at some different strategies in order to round out our awareness of other ways to price a software product.

Because most of these are more traditional approaches used by software developers, I thought it would be better to start a separate thread in order to allow the Fairware discussion to stay more closely focused on the unique aspects of that model - much of which goes far beyond the mundane issue of setting a price.

So...on to some other approaches to determine pricing for software products.

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A good starting point (either for discussion or experimentation) is a recent article on Smashing Magazine's website.

Smashing Magazine
You’re Pricing It Wrong: Software Pricing Demystified

   By Eran Galperin
   September 28th, 2011
   

Pricing your own product is always a tricky proposition, and the more critical the price is to your product’s success, the more difficult it is to set. It’s easy to look at another product and say how much you would be willing to pay for it, but how can you know how much people would be willing to pay for yours?

There are no absolute truths or perfect formulas for finding the best price, assuming that the “best price” even exists. Instead, take a structured approach to finding a good starting point, and improve it through feedback and testing. But first, you need to understand what the best price actually is.
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Well worth a read.

[mouser]

Thanks for sharing this 40hz! 

[Renegade]

Interesting.

I'm going to be doing some experimentation with pricing in the near future. I'll try to remember to post back some of my results.

I liked the quote from Joel in the article.

...nothing we have ever done at Fog Creek has increased our revenue more than releasing a new version with more features...

It confirms what I've been trying to tell people -- software marketing is release driven.

[barney]

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A good starting point (either for discussion or experimentation) is a recent article on Smashing Magazine's website.

Hm-m-m ... well, the argument there holds true to the marketing principles taught in most of academia.  But, then, I've never agreed with certain precepts of those teachings.  Prolly why I didn't get a marketing degree  .

Perceived value is discussed from the vendor's standpoint, but it is seldom approached from the standpoint of the buyer(s).  There are [at least] two (2) variants on that concept.  The marketing concept is reasonably well presented in the article.

But there is another perceived value, that of the customer, that is often quite different and often overlooked or ignored.  If the customer is buying for pride, bragging rights, or something similar, then the proffered methodology is, I suppose acceptable.  If the customer is attempting to purchase functionality, the methodology fails.

Look, if I buy software, I buy it for a specific purpose, whether it be MS Office or a simple copy app.  If the software performs - not according to marketing hype, but according to my needs - then it might have been worth the monies paid for it.  But probably not.  Most software I see marketed tries to make up for all effort expended upon it - in one (1) sale.  OK, maybe ten or a hundred sales  .  But almost all the software I see is grossly overpriced for its functionality.

I should prolly keep my mouth shut  , since all my development was in-house, and I never had to make a living at it.  I've just got some really strong feelings about how software is marketed and priced.  That's one of the reasons I'm here at DC - I'll donate according to my needs and abilities at the time, but most software pricing just galls me.

OK, I'll shut up now  .

[Renegade]

@barney - Can you give some examples of what you mean?

I'm a bit surprised though. As you're doing in-house development, you probably have seen how some tiny feature that should take a day can stretch out into a major deal that takes forever. Efficiency can sometimes suffer in larger organizations. (Ok, maybe that's an understatement, but whatever.)

One of the problems with software is that it simply costs a lot to sell it. Getting the word out is extremely difficult. AdWords is a primary advertising channel for a lot of people, and Google is very good at extracting every single penny that they can from advertisers. With marketing costs so high, how else can you price software? The development costs are generally fixed, but your marketing costs, or rather advertising costs, are pretty much on a per sale basis.

So if you're spending say $0.50 per click, with a 2% conversion ratio, you've spent $25 to sell 1 copy. Unless you're charging $26 or more, you're guaranteed to lose money. And that doesn't factor anything else in - just advertising. Ouch!

On top of that, advertising inventory is limited, so it's not like you can just say, "Oh, let's sell our software for $27 so that we make $2, and do that a million times so that we make 2 million dollars." You can very quickly max out the available advertising inventory that Google has, and then you still need to pursue other advertising channels. But all of that requires effort, and at the end of the day, you may spend all your available marketing time on Google with little left over to invest properly in other channels. That makes other efforts less productive, and drives you back to Google in a vicious circle. I've seen that time and time again in developer forums -- people focus on Google to the point of self-destruction.

I suppose that a lot of software is overpriced, but I really don't know what can be done about it given the environment we live/work in.

Regarding the 2 sides of "value" - I think it's unfortunate, but "value" has been so bastardized by marketing, that I don't see any salvation for it. I mean that the value of something in terms of its utility is a dead concept. Marketing has become about propagandizing and evoking emotional responses, and rationality has largely departed from the game. Apple ads are a great example. Apple itself is a great example. It has become a religion, and anyone that questions the dogma is a heretic.

The same principles apply to other "religions", like climate change. If you dare question the holy litanies of climate change, you're a heretic.

In less extreme examples you can see this in academia in pretty much every discipline. If you come up with something that questions accepted dogma or puts forth an alternative explanation, you're drummed out as a kook.

Rationality simply has very little place in the world. I think software prices would be lower if that weren't true.

[db90h]

You can do all the studies in the world and you'll eventually arrive at the conclusion that consumers willing to pay for a good or service will pay what they consider a reasonable price, while those who will not pay, will not pay any price, no matter how low. I've never increased volume by lowering my prices either. I wish I could say I did ;o. Then we could really lower the cost of software.

[Renegade]

You can do all the studies in the world and you'll eventually arrive at the conclusion that consumers willing to pay for a good or service will pay what they consider a reasonable price, while those who will not pay, will not pay any price, no matter how low. I've never increased volume by lowering my prices either. I wish I could say I did ;o. Then we could really lower the cost of software.

I can absolutely say that lowering prices works... if you do it right... which in the software world, a lot of guys don't...

The problem is one of setting a proper base-line. Once you have that, you're set. If you don't have a base-line, you're hosed and lowering prices will only hurt you, in general.

I posted a little bit on that topic here:

http://cynic.me/2011/09/15/creating-urgency-for-sales-with-infralution-licensing-system/

I'll post more in the future, but that's the general idea on how to lower your prices properly. (There are other ways, but that's one that works.)

[db90h]

I will research and study your methods, if this is true it is a paradigm shift for shareware authors still selling their software.

[Renegade]

I will research and study your methods, if this is true it is a paradigm shift for shareware authors still selling their software.

I wouldn't say that it's a paradigm shift. The general strategy has been used for a long time in retail, and also in software, though not so much in software.

I haven't backed up what I posted with a lot of empirical evidence because I simply don't have the time to collate it all, and even if I did, I don't post numbers for GDT (which is where I get a lot of the information). Other information I have I cannot post because it doesn't belong to me.

However, it's not all that difficult to try it out for yourself. I've posted other information about how I'm integrating ILS, IPN.NET, PayPal, and TrialPay into some software that I'm about to release very soon. While the details might not be relevant to you, the general principles are in line with what I wrote in the other post, and can serve to help get a system that works for you up and running.

The flow chart that I posted might help some. Most of the logic is in the first decision process. I've not posted on that too much, but once I've released, I hope to get back to that and post some results along with a longer explanation of that first decision process.

[Renegade]

I just got my copy of ASPects today, and there's an article in it on software pricing by Al Harberg.

...software developers should base their prices by figuring out the value of the product to their customers.

It seemed obvious to me...

“Higher prices don’t just talk,” Beckwith insists. “They tempt.” My 25+ years of marketing experience in the software industry confirms this belief. In the software industry, most developers will tell you that their Pro version outsells their Standard version.

I've heard that elsewhere as well. From my own experience, I can say that it works.

There's a lot more good stuff in there, but... You must be an ASP member to get a copy of ASPects.

[Ath]

“Higher prices don’t just talk,” Beckwith insists. “They tempt.” My 25+ years of marketing experience in the software industry confirms this belief. In the software industry, most developers will tell you that their Pro version outsells their Standard version.

Isn't that because the Pro version usually has some crucial feature desired by 100% and bought by ~60% of all users

[Renegade]

“Higher prices don’t just talk,” Beckwith insists. “They tempt.” My 25+ years of marketing experience in the software industry confirms this belief. In the software industry, most developers will tell you that their Pro version outsells their Standard version.

Isn't that because the Pro version usually has some crucial feature desired by 100% and bought by ~60% of all users

I think that in part it's gear-lust at work, and part ego at work. Not sure exactly why, but for whatever reason, it seems to work.