Software Pricing: Are We Doing It Wrong?

One of the side effects of using the iPhone App store so much is that it's started to fundamentally alter my perception of software pricing. So many excellent iPhone applications are either free, or no more than a few bucks at most. That's below the threshold of impulse purchase and squarely in no-brainer territory for anything decent that I happen to be interested in.

This is a companion discussion topic for the original blog entry at:

Microsoft do not want you to buy retail copies of Windows. Their money comes from OEM including the OS with new machines (or even if the OEM doesn’t include the OS - they still pay)

If MS offered cheap retail pricing people wouldn’t buy new hardware, that’s why it’s cheaper to buy a whole new machine than upgrade from XP to Vista - and why OEM copies can’t be upgraded.

It’s rather ironic that the MS model is driven by the demands of the hardware makers, while Apple’s (who is a hardware maker) isn’t.

It looks like the example math might be wrong. When you calculate for the 10% discount value, the solution is 4000 (base price) multipled by the 35% increaser value, or 1.35 scaler (or 1+(35%)/100). With this you get Atwood’s value of 5400. However, if you continue this equation (using 1+(%)/100 as the scalar), the numbers are as follows:

10%: 5400
25%: 13800
50%: 16800
75%: 62800

If you continue the calculations to answer the question: “how many people bought the software?”, you get:

10%: 150
25%: 460
50%: 840
75%: 6280

WOW!!! It looked like a simple exponential curve until you get the astronomical increase of 747.6% buyers! If this data is as accurate as it sounds (and it would still surprise), then I would expect 75% discount to be very close to that soft-spot of maximum revenue.

It’s the same with PocketPC and have been so for years. You can’t charge more than 10-20 bucks.

One idea is to sell 30 levels at a time for $10. So if the game is 120 levels you’ll get it for $40. That way you can evaluate the game and if you enjoy you don’t mind paying ten more dollars for a week of fun.

I don’t know a lot about economics, but it has some similarities with the Laffer Curve .

It would be interesting to see at what point Valve would lose revenue when decreasing price. What is the “sweet spot?”

And with every copy sold, your market has shrunk, as those customers won’t be repurchasing (unlike the Laffer Curve and government taxation).

I think something else to consider here, is the ‘bargain’ effect… I think that the sale itself is what drives the huge increase, more than the price itself. In other words, I don’t believe Valve would have made as much if they had started at the smaller price from the beginning.

When I go shopping, if I see a new game at $29, I probably won’t buy it ($29? must be crap!). However, if I see an older game at $29 down from $99, I’ll jump on it ($99? must be great! and I’m saving $70!! buy buy buy)

I tend to agree with Gerald. The sale was success because usually the software costs $40 but now for limited time, hurry, for $10.
I have experimented with pricing of my own software and sometimes it seems that the price is not that important as one may think (selling for $10 does not sell twice as much copies as selling for $20). But it probably depend on many factors like competition, market niche etc etc.

Don’t forget that there is a “cost” associated with each sale! You might make more money and more sales, but you’ll also end up with a lower profit per customer, and someone has to support all those customers.

One of the reasons Apple computers are “premium” is that Apple is interested in customer service. Ask people who’ve been to the Genius Bar at Apple how’s the service. Ask people who’ve used phone service. Generally, Apple has the best customer support. Dell and HP sell more systems, but they can’t give users the same customer support.

By the way, the “Apple” upgrade is only for people who bought the last OS for $125 or got a computer in the last year. Normally, Apple charges $125 for upgrades, but this time, Apple wants users to exchange Leopard for Snow Leopard and priced it accordingly.

Microsoft, on the other hand, has no reason to get Vista customers to upgrade to Win7. Vista is a pretty modern OS with almost all of the basic core security features of Win7. Now, Microsoft would like WinXP to go away, but they can’t offer a discount for a WinXP->Win7 upgrade, but not a Vista->Win7 upgrade. Besides, to upgrade from WinXP to Win7 involves getting new hardware.

I agree with the windows thing. Being a linux kind of guy the only interest I have in windows at the moment is running it in a vm for the annoying times when there’s no sensible way to do what you want without windows (eg, itunes).

I’ve had an old copy of XP for this. I’d kind of like to use vista instead, but it’s too damned expensive, and being a geek I want everything, not some artificially hobbled creature. Same goes for win7. Maybe I’ll buy a copy at some point, but for now, I’m sticking with my xp disk.

At £30, I’d just pick it up, provided I knew I wasn’t going to come across the old ‘you can’t do that in this version’ issue.
The other thing that stops me is, of course, the wondering whether this 90th vm installation is going to activate or not, and whether wga is going to call me a criminal.

Looks like they priced Left 4 Dead correctly, eventually. But in the meantime they managed to get people like you buying it at twice the ‘optimal’ price.

This is all pretty standard marketing/economics, have a read of ‘The Undercover Economist’ it’ll make you see everything differently.

As long as support costs don’t scale in line with sales.

It’s true - I spend little or no money each month on music, very occasionally buying an album if it’s particularly good. The cost is just too high at around 10UKP per album.

However I had a spate of buying singles and albums from (the russian download site of dubious legality) at around 10 cents a track, or a dollar or two an album. I was regularly spending 15-20 UKP on music per month. If this had been a legal site where the money was going to the music industry, the industry would have been getting probably 6-9 times more of my cash than they do currently…

but FREE IS FREE!!! I would rather don’t pay any money at all because I’m a really parsimonious bastard. That’s why I like FREE SOFTWARE!!! It’s like a nice hippie-collective where there’s everyone sharing flowers, rainbows and software. And it’s like FREE BEER too!! No one says NO TO free beer!!!

Making the software as cheap in the first place would not have resulted in these increased sales.
Tell the buyer the worth of what he is buying first, and then give him the bargain for this jewel!

Ant - yes but they’d have been getting less money from those willing to pay the prices now. The key is figuring out how to make everyone pay as much as they are willing to, this is also the hard part.

@David W - on the other hand, if your product has a modest monthly subscription too, suddenly you’ve got 6180 extra customers paying that…

I don’t think your point applies to Windows. It’s not an application, but an operating system, so you basically need one (you own different operating systems, but probably not too many different versions from MS). MS has market share there too close to 100%, so it cannot gain new customers either.

What you describe works well for software which you don’t have to own but you have great choice if you want to buy something. If there were a game that everybody would like to own, optimal (from the point of view of profit maximizing firm) pricing would be similar to Windows. If you make just one of many similar games, optimal pricing is different.

W7 upgrade upgrades box version to box version, that you can move to new PC. 10.5 upgraded to 10.6 is still an OEM version, that is good only for existing mac with 10.5, and when this mac dies - it’s worthless - newly bought mac will have 10.6 anyway. Afaik this 10.6 upgrade is also only valid for upgrading from 10.5: users of 10.4 (released in 2005) are encouraged to buy $169 “mac box set” instead.

My experiences from the AppStore is that revenue remains constant almost regardless of price. But higher price usually gives more dedicated users and less support (and actually, high ratings). I should say that my app is a niché app with no chance of entering the top 20 list - I think the rules are different for such apps because of the strong exposure for the app in the main top 20.

I don’t agree about the comparison between the pricing model of Windows and OS X. Apple produce hardware which they make money on allowing them to sell the OS at a much lower price, Microsoft don’t.