Thursday, October 27, 2011

Skimming : Don't Just Roll the Dice

Don't Just Roll The Dice - A usefully short guide to software pricing

Some – but not too much – economics

  • From the diagram, you can see you should price the Time Tracker 3000 at around $300. It’s not where you’ll sell the most units, but it’s where you’ll make the most money. (p.13)

Pricing Psychology: What is your product worth?

  • These two facts, the awfulness of the product and the magnitude of its success, can be reconciled if you understand that Sage’s product is more than just the software.(p.16)
  • If you want to change how much Willhelm will pay for your product, then changing the product is one option, but only if you can also change his perception too. In fact, it turns out that you can change Willhelm’s perception of your product’s worth without touching the product at all. That’s one of the things marketing is for. (p.18)
  • People base their perceived values on reference points. If you’re selling a to-do list application, then people will look around and find another to-do list application. If they search the internet and discover that your competitors sell to-do list applications at $100 then this will set their perception of the right price for all to-do list applications. (p.19)
  • Ultimately, it comes down to differentiating your product. (p.24)
  • If your customers can’t find a reference point for your product, then they look for proxies, or signposts. (p.25)

Pricing Pitfalls

  • If you are going to compete on price, then you should minimize the possibility of a counter-reaction from your competitors. (p.27)
  • They put a copy of your software into the hands of people who will not pay, cannot pay, are too dishonest or too principled to pay, or who simply don’t value your work that much. However, a pirated copy will end up, eventually, in the hand of somebody who will pay.(p.29)
  • The second reason that pirates can be your friends is that they are a bellwether. They indicate the existence of a market failure. (p.29)
  • There are some things you can do to mitigate switching costs, and even to use them in your favor.... Early versions of Microsoft Word not only opened WordPerfect files, but had a dedicated section in the help for WordPerfect users, and even allowed you to use the WordPerfect shortcut keys. (p.31)
  • You might have spent one hundred dollars developing your product, or a million, but that money is all spent. Gone. It’s a sunk cost. What matters now is not how much you’ve spent, but what people are prepared to pay. (p.34)

Advanced Pricing

  • That’s what’s versioning is about. It’s a mechanism of segmenting your users according to their willingness to pay. You figure out if you can group your customers in different ways, and then see if those groups are willing to pay different prices for your product. (p.36)
  • But here’s the second subtlety. This only works if people can easily compare the products being versioned. (p.39)
  • If you insist on selling a site license then make sure you define ‘site’ well. Is it for a specific office, or country, or worldwide? (p.45)
  • You must consider your customers’ purchasing processes when you set your prices. If you’re selling to businesses, then there will be a number of thresholds that you need to think twice about before crossing. ... At each stage, not only does the cost increase, but the hassle does too. If you can figure out where these thresholds lie (and they move around as the state of the economy changes, and according to the characteristics of your customers), then it’s worth pricing your software just under a threshold rather than just over it. (p.45)
  • If Starbucks can de-commodify coffee and charge $4 for coffee beans and hot water, if Stormhoek can de-commodify grapes (the only wine maker I know of who sells branded G-Strings), and if Perrier can de-commodify water, then you can certainly de-commodify the complicated software application that you have created. (p.48)
  • The mere fact that customers could try out your software, if they wanted to, transmits a strong signal about its quality. (p.49)
  • At the very least, you need to be careful, and make sure the free version is good enough to be useful, but not so useful that it cannibalizes paid-for sales. (p.49)
  • Network effects occur where the value to your customer of using your product increases as the total number of users increases. (p.51)
  • 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. (p.52)
  • When choosing your pricing model, here are two recommendations. Firstly, be boring. Secondly, license your software as your customers expect it be licensed – fit in with their business model.(p.58)

What your price says about you (and how to change it)

  • Prices are never neutral. They send signals. For example, a high price can signal that you have a quality product. ... If your competitors are selling software at $10,000 a seat, and you’re selling yours at $100, then that says something about you. Of course, you might be saying ‘game changing’, but your customers might be hearing ‘toy’. (p.60)
  • Whatever price you choose, the signals it sends need to fit in with your brand, and your brand needs to fit in with your reality. (p.61)
  • You’re never going to know if you’ve chosen the exact right price or not, but you should experiment once you’ve set your initial price; not experiment in the scientific sense of forming a hypothesis, changing a single variable, and accepting or rejecting the hypothesis, but in the sense of changing something and seeing what happens. (p.62)
  • It’s not what your customers say that’s important, it’s how they behave. Whenever you make a price change, pay close attention to what your customers do. If they stop buying, rethink. (p.64)