Pricing software

time to read 7 min | 1367 words

It seems that people make some rather interesting assumptions regarding software pricing. When talking about commercial products, there is a wide variety of strategies that you might want to push, depending on what exactly you are trying to achieve.

You may be trying to have a loss leader product, gain reputation or entry to a new market, in which case your goals are skewed toward optimizing other things. What I want to talk about today is pricing software with regards to maximizing profits.

Probably the first thing that you need to do consider the base price of the product. That is important for several levels. For the obvious reason that this is what you will make out of it, but also because the way you price your product impacts its Perception of Value.

If you try to sell your product at a significant cost below what the market expect it to be, the perception is that it is crap, and you are trying to get rid of it.

Another issue that you have to face is that it is very hard to change the base price once you settled on it. It is fairly obvious why you have a hard time jacking the price upward, but pushing the price down is also something to approach with trepidation. It has a very negative impact on the product image. Now, you can effectively price it at a lower rate very easily, but doing things like offers, discounts, etc. Those do not affect the base price and so generally do not affect how the product is perceived.

And just as bad as with setting the price significantly below market expectations, setting the price significantly higher than market expectations. The problem here is that you come out as a loony with delusions of grandeur. Even if your product is wonderful, and even if it will return its investment in a single week, pricing it too high generate a  strong rejection reaction. It also means that you need to actively combat that perception, and that takes a lot of time & effort.

Finally, in the range between too little and too much, you have a wide room to play. And that is where the usual supply & demand metrics come into play. Since supply isn’t a problem with software, what we are talking about is demand vs. price. Everyone in imageeconomics is familiar with the graph, I assume.

As price goes up, demands goes down, and vice versa. So the question is what is the optimum price point that would generate the most revenue. Here are some numbers, showing the probable correlation between price and sales.

Price Users $
$ 2,000.00 1.00 $ 2,000.00
$ 1,000.00 1.00 $ 1,000.00
$ 200.00 100.00 $ 20,000.00
$ 100.00 200.00 $ 20,000.00
$ 10.00 5000.00 $ 50,000.00

It might be easier to look at in its graphical form to the right.

You can see that when the price point is too high, very few people will buy it, if at all. When the price point is in the range that the market expects, we make some money, drastically more than we would when the price was above market expectations.

However, if we set the price way down, we get a lot more users, and a lot more money pouring in. We will ignore the question of damage to the reputation for now.

This seems to indicate that by lowering the price we can make a lot more money, right? Except that it isn’t really the case. Let us see why.

1 in 10 users has a question, requires support, etc. Let us say that each question cost 100$, and now let us look at the numbers.

Price Users Calls Support Cost Income Revenue
$ 2,000.00 1.00 0.00 $ - $ 2,000.00 $ 2,000.00
$ 1,000.00 1.00 0.00 $ - $ 1,000.00 $ 1,000.00
$ 200.00 100.00 10.00 $ 1,000.00 $ 20,000.00 $ 19,000.00
$ 100.00 200.00 20.00 $ 2,000.00 $ 20,000.00 $ 18,000.00
$ 10.00 5000.00 500.00 $ 50,000.00 $ 50,000.00 $ -

And that tells us a very different story indeed. The end goal is increasing profit, not just the amount of money coming in, after all.

Oh, and a final thought, the following coupon code EXR-45K2D462FD is my pricing experiment, it allows the first 10 users to buy NH Prof, L2S Prof or EF Prof at a 50% discount.

Since all the coupon codes run out in a short order, I am going to continue the experiment, this coupon code ER2-45K2D462FJ will give the first 25 users to buy NH Prof, L2S Prof or EF Prof at a 25% discount.