Our background is in building IT systems and software, some to be used internally by global businesses, and some to be sold to commercial customers. This experience can be used to help ‘ICT intensive businesses’’, i.e. those business that develop and sell software or whose competitive advantage is based upon software it has developed, grow your revenue. It can also be applicable for service businesses that supply software and hardware related products to their customers, e.g. digital agencies.
“How do I price my software products or solutions?” is probably the most common question I’m asked by software entrepreneurs, product managers and senior directors working in this industry. This series of blogs will attempt to answer this and other questions.
Like all good MBA students let us unpack this question, and answer each part before coming up with an answer that suits your business.
- Are you going to price low and sell lots, or price high and sell a few?
- Do you want to start with a ‘free’ model to build up customer base
- How does this fit into your company’s brand, the product you have and the image you want to project?
- Do you want to price just below an existing competitor’s offering to show what great value you are?
So yes you can do all the economics around product pricing using demand curves, competitive and feature alternatives. But product pricing is as much art and craft as it is science. It helps to understand the economics and psychology of pricing, but theory can only tell you so much. At some point, you need to make a decision and do it.
Bill Gates explained how his software was priced. He called it crazy and very much like book publishing (in fact this is the business model he took for Microsoft and immediately had all the legal structures in pace form day 1 (copyright, licensing, authorship, distribution, etc.). It seems strange today that any other business model was considered! He wondered how any business could survive using traditional economics when the first copy of the product cost $5 million to produce and sell, and the next copy cost $5. So he is one of the richest people in the world so he found out how to price and sell his products.
The amount you charge for your product is not the only decision you must make. You also need to decide how you want to charge. There are plenty of models, including
- Subscription model (paying many small amounts is psychologically easier than paying 1 large amount)
- Pricing per user, (e.g. per named user or concurrent user)
- Freemium model, where a small number of paying customers subsidize the majority of freeloaders
- Pricing per physical or virtual server licensing model
- Usage based on how often or how much they use your software
Many businesses end up with a mixed model, e.g. up-front revenue and a recurring income. The overall objective is to grow your revenue sustainably.
The next articles will discuss this in more details, 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.