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Some say pricing software is an art, and that maybe true. Pricing software can be a very difficult proposition. It can be a challenge to find the pricing "sweet spot", the price that generates the most revenue. Some developers experiment with A/B split testing while others take a critical look at their closest competitors and determine how they wish to position themselves in the market.

Not surprisingly developers often under value the value of their software. Undervaluing software is as bad as over valuing. If the software is priced too low customers will not purchase because they might think there is a catch - it is a perceived value or lack of value that "cheap" software faces. Like it or not an inexpensive software application might be perceived as poor quality and frighten prospective customers away. Higher price implies higher quality, cheaper is not always better.

Pricing can be a marketing strategy. To low and poor quality might be assumed. To high and the price might frighten prospective customers away. The pricing sweet spot is the price that results in the largest profit.

Example:
Sell 100,000 at $ 1.00 each = $ 100,000
Sell 10,000 at $ 30.00 each = $ 300,000

Keep in mind that the overhead is typically smaller with less customers. Developers should try to maximize the profit on each sale.

A number of factors need to be taken into consideration in order to price software. Look at competing products and then ask yourself the following questions:

How much will customers pay to use the software?
How much do competitors charge?
How much is the software worth to customers?
what are the differences between the products?
How does your software stack up?
How much competition is there?
What is the market saturation?
How do you define your product and market?
How does the software compare to freeware?
How much would the software cost to develop by another company?
What were the actual development costs or time involved?
What kind of software is it?

Software that is vertical in nature (targeting a narrow market) tends to be more expensive than software that is mass market or software that has a wide audience appeal.

The laws of supply and demand can and should influence software pricing. How many other options do your customers have? If the market segment is small but the software is critical to operations, you will have more latitude in pricing.

It is also important not to overcomplicate pricing schemes.

A/B Split Testing
Once you have settled on a price setup A/B split testing and test your pricing.

Psychology of Price
For whatever reason $ 29.95 and $ 29.99 are less than $ 30.00 and $ 69.95 is viewed as far less than $ 70.00. This is often referred to as the psychology of price. As a result developers should price their software accordingly.

Niche Pricing
It is well understood that niche products have a lower demand but a higher price. Developers who sell into a niche are able to charge a premium because the developer understands the specific needs in the niche. The price of niche or vertical software is also usually higher because the market segment is smaller and there is usually less competition.

Quantity Discounts
It is common practice to offer customers price breaks for large purchases. Consider setting up a sliding scale so that the more software the customer purchases the larger the discount they receive.

Upgrade Pricing
Many developers leave money on the table when pricing software upgrades. This is a common mistake. Existing customers are an excellent source of revenue. Charge a nominal fee for version upgrades.

Site Licenses
Site licenses are an expansion of quantity discounts and can bring in significant revenue from large companies.

OEM Pricing
OEM stands for Original Equipment Manufacturer and it is when a company sells products (including software) under its own label, that include technology licensed from another vendor. Volume is critical for OEM deals to be profitable. In most OEM negotiations profit margins are small but quantities are large.

Educational or Nonprofit Discounts
It is not uncommon to provide educational discounts, or discounts to non-profits. There is no "typical" educational discounts. Discounts can vary from 10% to 90% off of the list price. If this is a market segment you sell to, keep a discount value in mind when setting the price, as many non-profits and educational institutions are accustom to receiving discounts, and may be put off by not receiving one.

Reseller Discounts
Resellers can extend your sales force. When settling on a price it is important to consider the role resellers will take in the products success. If the application is priced too inexpensively, resellers will not have an incentive to recommend the software - nor will their be much margin for you to share with these resellers.

Affiliates
The more money you are willing share for a sale the harder your affiliates will be willing to work. Affiliates refer customers to you and receive either a flat fee for the referral or a percentage of the sale.

Competitive Discount
Competitive discounts are when you offer a price break to a customer who is using a licensed competing product that performs the same function as your software. This can help entice those customers to switch to your product.

Legal Issues With Pricing
There are laws in various countries with respect to pricing. Some of the laws prevent manufactures from:

Price Dumping :
Selling goods at less than the normal price.

Price Fixing :
Representatives from several competing companies scheme to set the price.

Related Articles:
How to License Software
How to Manage Upgrades