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A Sixty-Minute Guide to Software Pricing January 3, 2010

Posted by Peter Varhol in Strategy.

Earlier this year I received a copy of Neil Davidson’s Don’t Just Roll the Dice – A usefully short guide to software pricing.  I just got the opportunity to read it, and recommend it to anyone who participates in the software pricing process, or even anyone interested in the considerations that go into setting a price for software products.  It’s a short book, full of easily understandable examples, and took me only an hour to finish it.

Davidson’s book is available as a free ebook here (it’s over six MB, so give it a couple of minutes to download), and is published under the Creative Commons attribution noncommercial-no derivative works license, which means that it is free and freely distributable, as long as it isn’t changed, and Davidson is given credit as author.

One might think that software pricing was easy – plan to amortize the development costs, make a profit small or large, and set your unit price accordingly.  Neil notes, however, that if your development costs exceed what the projected customer base is willing to pay, you will crash and burn.

Davidson points out that any number of factors should influence pricing, including value to the customer, what competitors are charging, what the product does, and fairness.  Then he goes beyond pricing the product to look at the impact of different versions (I might instead refer to them as editions), bundles, different licensing strategies, and the customer purchasing process.

While emphatically not a treatise on how to make money off of free and open source software, Davidson does give pointers on how to compete against it with a commercial product.  He recommends not doing feature comparisons, and instead emphasizing the complete product, including support, the vision of product direction and the promise of upgrades, documentation, and training.  However, he does note that free can be a great way of letting users try your software, and building a market for it.

Perhaps the most important point he makes is that software pricing is as much art as science.  You can understand the equations, but there are too many unknown variables to be able to simply derive a single price that will optimize revenue.  Don’t be afraid to change the price if you find you’ve gotten it wrong, he offers as one last bit of advice.

I’ve been involved in software pricing decisions in the past, and while I knew intuitively many of the things Neil discusses, it is useful to see most of the considerations laid out so concisely.  However, the cynical side of me notes that he’s forgotten at least one consideration – how much commission Sales wants to be paid on every sale.  All too often, regrettably, that seems to be the principle consideration.

Once again, that URL is http://downloads.businessofsoftware.org/dontjustrollthedice.pdf.



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