Pricing Strategies

Posted on January 14, 2008
Filed Under Uncategorized | | Written by Gary Reid

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There is a very good article, if long and dated (C. 2004 although the content doesn’t really age) on pricing software over at Joel Spolsky’s blog.

Joel steps through the economics of pricing, segmentation, value pricing and after 5000 words gets to exactly where I am - you still don’t know what to charge

We will be launching B-Net in the next couple of days and having arrived at and moved away from around 100 different prices for the application I’m still not sure where to start.

Apparently Blognation spent $60k developing there app, or at least that’s what the developers are apparently owed.

I realise as much as the next person that you can’t use cost based pricing so it doesn’t really matter how much it cost us to develop and in fact it would be more opportunity cost I would need to look at as we stopped doing freelance work to code it.

I spent some time over at Linspire in 2003 and one thing Michael Robertson said to me was that you can put your price up, but never down. That’s an interesting point, and it means you can’t start off with a high price and lower it to find the best point on the demand curve. An example is webobjects dropping from $50,000 to $699. It makes for some very unhappy customers if you drop the price.

So, do you start low and increase the price. Well, this creates two problems, if the starting price is too low and customers perceive value by the price then this can cause problems, secondly those who purchase at the low price worry about the cost of future updates.

So, you can focus group the life out of it, except people will lie, what they say in a focus group rarely matches their behaviour when confronted with entering their credit card number.

With all this science you are still left with not a lot to help.

Should it be free?

I’m sure many would say yes, but how do we recoup our investment and how do we pay for the support we still would have to give to the product? My feeling on Open Source (that’s free as in free beer not free as in free speech because everyone expects open source to be free as in free beer, the utopian days of free speech are long gone) is that projects using it need a wide market, lots of users.

I would just ask those who want it free to consider my employees, imagine if your boss decided to give away your product and at the end of the month you go to collect your pay cheque and there isn’t one…

How do we factor in the revenue potential to our users, if they can make money out of it then is this a factor?

Do we use it as a loss leader to our other products, Dolphin does this by licensing their product using Creative Commons attributional. However, CC say

Creative Commons licenses are not intended to apply to software. They should not be used for software. We strongly encourage you to use one of the very good software licenses available today. The licenses made available by the Free Software Foundation or listed at the Open Source Initiative should be considered by you if you are licensing software or software documentation. Unlike our licenses — which do not make mention of source or object code — these existing licenses were designed specifically for use with software.

Do we follow the Radiohead example and have a pay what you want strategy?

Do we run a Dutch auction on the site for it?

At the end of the day I have to make a decision, one that’s not easy to make, one that could be wrong, but no matter what I choose I have to make it the right one.