Software Pricing: Are We Doing It Wrong?

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First, people are not infinitely rich, so they only have so much money to buy all the OSes, hardware, and software that they need. Price a non-trivial item too high and it will be pirated (i.e. most games) instead. Other items you can price high because of support commitments or product scope. There’s nothing earth-shattering at pricing most games lower and keeping OS prices above them.

Second, the basic premise is correct. Price something low enough and people will buy it just for grins. I call this the principle of the crack dealer. How do crack dealers get their audience? Sell it to newbies cheap or give it away and then slowly increase prices after that because people are hooked. I think app developers would go a long way in getting and keeping audience share if they approached it that way, as long as they didn’t really put the screws to the customers, of course.

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Another good example is the macheist Software Bundle. They sold over 88,000 copies.

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What about the cost of producOH WAIT it’s virtually free. Well played.

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Let’s not forget that most if not all iPhone apps are games or entirely useless applications, priced at “why not?” level. I read somewhere that customers rarely use these apps more than once.

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The effect is known as price anchoring.

From http://en.wikipedia.org/wiki/Anchoring :
"Consider an illustration presented by MIT professor Dan Ariely. An audience is first asked to write the last 2 digits of their social security number, and, second, to submit mock bids on items such as wine and chocolate. The half of the audience with higher two-digit numbers would submit bids that were between 60 percent and 120 percent higher than those of the other half, far higher than a chance outcome; the simple act of thinking of the first number strongly influences the second, even though there is no logical connection between them."
Another reference: http://www.cfo.com/article.cfm/3014027

With price anchored at $40, $10 seems cheap. But $10 anchored the other way might not sound so good: $10 seems expensive compared to an iPhone app at $1.99.

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It would be quite difficult to do any serious kind of study about this as there are many factors, one of which is the psychology of the consumer.

An important consideration is the mental footprint of the game and the reputation of Valve in the minds of those people that were aware of the sale. Also, the fact that the game was once $40 makes the $10 sale price attractive. However, if they had started with a $10 price right from the beginning, I doubt their profits would have been the same.

Software companies don’t have a fixed price per copy that they sell, at least digitally (except possibly for support costs). Instead, they have a fixed cost for the initial development and then each copy they sell chips away at that development cost.

The important thing to realize is that the person that buys the $40 copy and the person that buys the $10 copy are not the same person. They are two different types of people with different cost / value systems. So, by selling it at two different prices, you make $50, not $40 or $10.

Also, the cost of a game is not really based on anything but the price of other games. I think it would be fair to say that “Grand Theft Auto” cost vastly more to produce than “Space Chimps” but they both retail initially at the same price.

These prices are determined in collusion between console manufacturers and game development studios.

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I think the idea of selling windows much cheaper, would hurt sales of their corporate market, which will one day be forced to upgrade from xp(Then again probably not that soon).

Also, in the grand scheme of things, not many people in the world would feel comfortable doing an os re install. Out of everyone I know, only the techys are comfortable doing this, so they are the only people that would buy this product. I recently advised someone to go win 7 beta, even though its just for a year, as they would probably get a nice experience for a bit. This person was an investment banker QA person, which isn’t shy of technology, but if he can’t do it, then what hope do we have of mass os sales?

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Don’t underestimate the power of a sale.

Many people will buy something when it is on sale, b/c they think it is a deal and will be cheaper now than in the future.

It would take more study to prove it, but I would be willing to bet that starting at a high price to get more money from early adopters, then later having a sale that will grab the masses attention probably yields more money.

If Left 4 Dead had started at $10 lets say, they would have had a huge launch, but they wouldn’t have any room to offer a sale price once the game’s sales slowed.

This is a common problem on the iPhone App store. Many apps are popular at first, when they are in the whats new or featured list. However, once they are a little older sales drop dramatically forcing many to have a sale dropping the price from $1.99 to $0.99. Had they started at $0.99, they would be unable to go any lower, and those sales would be lost.

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For $20 you greatly reduce your pirated software, who won’t drop 20 on a game. MS could reduce their maintenance of old software if they had $30 upgrades. I think almost everyone would upgrade and then you have fewer demands for fixes to the old software. If nobody is using it you don’t have to maintain it. And for $30 if they tell you its fixed in the next version your just gonna buy it.

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There is certainly a pricing point at which below someone would buy a product, and yes, Windows is a great example. It is even better to compare the ‘family pack’ of the OSX Snow Leopard upgrade/update: 5 licenses for $49.

I am running Win2K inside a VM on my Mac (I occasionally use it for testing or to run software that only works in Windows, or for which I only have a license for in Windows). I see no compelling reason to upgrade to XP, Vista or W7, especially at the prices MS charges - especially since I use WIndows at home maybe once a month for a few minutes. That said, if an XP/Vista/W7 (pro) upgrade were $50, I would maybe buy it.

I used to write software for a medical software company - very small (I was the only full-time employee). The owner insisted on pricing the software well over twice what he should have sold at ($5K v. about $2K), and he had a lot of problems selling enough copies to pay his expenses (mostly my salary). At half the price he would have sold ten times the software and only had at most about twice the support expenses (which is another issue).

As others have pointed out, there is also other factors, such as ‘limited’ time offers, initial price (which is why many sellers artificially jack up prices so they can then drop them more - or seem to drop them more) and so on.

But yes, there is definitely a point where someone says ‘why not?’

Where that is depends on the product and its desireability. If someone were selling a new Rolls Royce for $5000, they would probably get a lot of buyers who don’t need a new car and don’t have the $5000 in the bank. If they sold it for $50K, probably not near as many, even though that would still be a super bargain.

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amen. I can think of so many examples I would guess the same economics would apply. 1 Password, TextMate, Path Finder a mac replacement finder? Everytime I get frustrated with finder I end up browsing their site looking at their product, but $40 is beyond my threshold. I bet every person I work with would have a copy if it were $5.

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The next time I have something to sell, I’d like to try an experiment - list it for a price that would make me giddy with happiness if someone bought it, and then reduce the price by a set, small amount on a set schedule. This way, it’s sort of like a reverse auction, and I have a chance of finding close to the optimum price and buyer combination.

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There’s another danger here as well — if certain software packages are very, VERY expensive, piracy no doubt jumps if they are important to anyone, and the incentive for an open-source solution jumps a lot as well. I’m thinking here of Adobe products, which have long been extremely expensive, and for which nearly everyone who is not making their living using them has pirated them. (The releasing of dumbed-down, crippled versions like Adobe Photoshop Elements has probably not fixed this, though I don’t know.)

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I looked at Windows 7 prices, thinking about getting a legal copy. For once. And my opinion is that even the cheapest version costs an arm and a leg. (and my freedom, of course)

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What you are talking about is economics - supply and demand, and price elasticity. I would suggest you pick up a good book on micro-economics which details this in much more details.

Software is a bit of a simple game… you can almost assume supply is infinite (with software this is sort of the case), so you really just need to focus on demand as the predictor of your software price.

Demand normally isn’t a flat line, where 2,000 people will buy you product if it was a billion dollars, and 2,000 people would take it if it were free.

Instead the relationship is “elastic”. That is what you are explaining… sort of. Elasticity is the change in demand based on the change in price by 1 dollar. That is, does putting your price up by a dollar loose a couple of customers, or does it loose you none?

When that is the case you have to work out if you put the price down by a dollar, are you likely to pick up more customers than you would loose from your current ones. Same thing in reverse for putting the price up, how many customers will you loose?

These answers are based on the market forces and price elasticity of your product.

But really, what matters in the end is the total revenue, which is a function of quantity multiplied by price. This is known as “the DuPont formula” after the company that first invented it. Put simply a fast food chain sells much more food than a five star restaurant
Fast food: High QTY x Low Price
5 Star: Low QTY x High Price

Which is better? Neither is better – they are different models and can BOTH be the same, or EITHER could be better than the other.

So which should you pick? That depends on the market. One model won’t work if it is located in a five star hotel, and the other wouldn’t work if it were placed in a fuel station (Petrol/Gas Station)

I would argue that the market for ERP products equates to a 5 Star restaurant while IPhone apps are the Fast Food of the software game. So they are not comparable and must be considered completely independently.

If you increased price of IPhone apps you would likely loose a lot of customers because that customer base won’t allow for it, but if you increase the price of the ERP software most customers will fork out anyway.

The market is normally very efficient, so you will find that products within each market are priced very accurately. If a vendor puts the wrong price on a product they will know to put it up or down in very short order.

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Software Pricing: Are We Doing It Wrong?

Yes, see StackExchange!!! http://stackexchange.com/

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Jeff makes a good point. Although, he needs to keep in mind, if it isn’t priced at the higher amount to start with, the discount feels less special and is less likely to have such a big effect.

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Interesting findings, thinking about it it all makes sense. By the way, the Windows 7 Home Premium upgrade was $49 for ~2 weeks end of June-July 11, as a “thank you beta testers” sale. I wonder how the sales were effected (other than the fact that IMO Windows 7 is infinitely better than Vista (I would NEVER use Vista), and people have been waiting to get rid of the Vista crap for years).

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If Microsoft were to price their basic Windows 7 upgrade at $10 and their full-featured version at $20 I do believe they’d have a very high percentage of their user base running current software by this time next year.

Instead they’re going to price the basic version at over $100 and the full version at over $200. This will virtually guarantee that the vast majority of Windows users will still be running nine year old and obsolete XP at this time next year.

Apple must be very very pleased with Microsoft’s pricing strategy on Windows.

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If game publishers would drop the price of console games, I’m sure there would be a surge in purchases. I remember the first Xbox games, they were around 90-100$. And what are they now? I bought ET:QW last summer for 60~$. And the same game on Steam is 1/2 the price? You pay a price when you’re locked in.