|
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
Increase Software Sales
How
to Compete Against Free Software
How to License
Software
How to Manage
Upgrades
Free
vs. Paid Software Upgrades
|
Developer
101
How to Price Software