Should you give away your software for free – maybe it is a way to grow your software business. Economists have proven that in any efficient market, the cost of a good will be driven down to its marginal cost of production. If you’re one of many producers selling widgets then consumers will shop around for the cheapest wrench. If it costs £5 to produce the next widget, then widget manufacturers will compete only price, undercutting each other and driving the price lower and lower, until it’s at the lowest price that still allows them to make a profit: £5 plus 1p.
Computer software, as the economist’s state, has zero marginal cost. It costs nothing to ship the next version of the software to your next customer, really true when shipped using the Software as a Service delivery model. Therefore, the price that consumers will pay for your software, and the cost you must sell it for, will eventually approach zero. The success of open source operating systems such as Linux, the Apache web server and the Open Office or Libre Office suites illustrate this point.
But I believe this argument has a number of problems with it. First, you are not just selling bits and bytes; you are selling a whole bunch of stuff around it, e.g. support, documentation, training, advice & guidance, etc. Your customers are buying decades of efforts in this software product. Is it worth £100 or £1,000 – well I think so and you should tell that to your customers?
Secondly, computer software is not a commodity – you must show and explain to your customers this. If your potential customers consider amazing software as just one of many similar solutions, then you deserve that the price you can charge will be driven ever downwards.
If Starbucks can de-commodify coffee and charge £3 for coffee beans and hot water, and Evian can de-commodify water, then you can certainly de-commodify the complicated software application that you have created.
Saying this ‘free software does have a place in for software companies not least because the marketing concept of ‘free’ has a hold over consumers. And it’s a power that you can harness.
Free trials let your customers try out your software for free, to make sure it fits their needs before they buy it. The fact that customers could try out your software, if they wanted to, transmits a strong signal about its quality. Also when customers do try out your software, it can increase its perceived value.
Free trials are not always possible. Free trials only work for software that people use again and again, and where the free trial doesn’t fix the problem by itself. Similarly, if people require a lot of hand-holding to use your software, or if it is of a low quality, then free trials are unlikely to work.
The freemium model involves providing a free version of your software for some people, and a paid-for version for others, with additional functionality in the non-free or ‘pro’ version. Typically, the ‘standard’ product will be free, and the ‘pro’ version will be paid for.
However, giving your software away for free is a not great way to make money, despite being extremely prevalent in the industry. You must be very careful, and make sure the free version is good enough to be useful. Also it should not so useful that it cannibalizes paid-for sales.
It can also require extremely high volumes to make it work – if you adopt the freemium model you will need an owner with very deep pockets!
There is a situation where free is the best price for your product: where there are strong network effects. Network effects occur where the value to your customer of using your product increases as the total number of users increases. For example, the value of using a service such as Skype increases as the number of people you can call increases; also the value of a social network increases as more people join, etc. For these platforms that utilise the network effect you get a growth or usage loop, i.e. the more people use your application, it becomes more valuable and then more people join, ad infintium?
Free becomes even more important when your networked product has competitors. In this situation, it turns out there are two stable situations no customers, or plenty of customers, and that there is a critical point beyond which user numbers accelerate quickly. Get past the tipping point and your user base will accelerate rapidly. If you don’t quite reach the tipping point then your user base will shrink back to zero.
Look at the uptake of the fax machine, the telephone and other inventions that rely heavily on network effects and you’ll see a similar pattern. It becomes, therefore, extremely important to reach the tipping point as quickly as possible, and the ‘free’ price point is a good way of doing that.
Of course, once you’re past the tipping point you’ll need to make money from your product, without losing users.
The next articles will discuss how different pricing mechanism can help your business grow – so keep coming back here for more. Or if you cannot wait and want a free discussion with Phil about the specifics relating to your business them call or email directly our details are here.