If you are selling software or want to sell your software in the future, you’ve run into the problem of determining how to price it.
There are so may different ways to look at pricing and so many factors that come into play. The problem is many pricing decisions are made on a “gut feeling” rather than taking all of the factors into account.
Why does it have to be so hard?
Let’s look at some of the ways software can be priced. This discussion is going to be based on client (desktop) installed software. We’ll tackle cloud or SAAS in a future post.
Based On Cost To Create
Just like any other product, software has a cost associated with creating it. There’s all the labor hours spent in the design, coding and testing of the product. There can be tooling costs associated with development and testing. Many times, there’s training costs for the team developing the product. Then comes the marketing, sales, packaging and delivery costs.
Can these all be factored into the price of the software product? They can be and often are if you’re selling the product to one client. But what if you’re going to sell the software to multiple clients? It would be nice if you could recoup your investment every time you sell the software, and in some cases, that’s possible, but probably not likely.
Based On The Market
Software has a market value that is based on what the market is willing to pay for a product. It also involves what is being charged for competitive products. How do you determine market value? The easiest way is to see what your competitors are charging. Half the time these prices will be published and the other half they won’t, so you have to do some detective work to determine this.
It’s tempting to try to undercut a competitor thinking that most people buy on price. Don’t go down that road! You can easily be perceived as having less value because your software doesn’t cost as much as a competitor. This has happened to us in the past.
Based On Value
What value does your software product provide to its end user or company? It’s up to you to measure and quantify this. For example, if using your software saves a company 30 person-hours a week and the average person is paid $20 an hour at the company then the value of your software over a year is $31,200.
There’s also perceived value. Many times the value of a product goes beyond the cost savings provided by using it. There can be additional value by how it makes the users feel. There can be additional value in how it makes the users or decision makers look to management.
There’s also value outside of the software by the service that you provide in support of your software.
It’s up to you to figure out these perceived values, client by client as you’re doing your sales.
So Which Is Best?
Software pricing is hard. You can make it easier by using each of the before mentioned ways of pricing your software. First determine the value it provides. Then determine what the market range for similar products is and then compare that against the costs involved in creating it.
You can’t use just one method. You’ll need to use all three to determine what price you should put on your software to start. Notice, I said to start. You can always adjust the price later, but using all three methods should get you pretty close.
Hopefully, you’ll get a return many times over what it cost you to develop it. Otherwise, if it’s early in the process and you haven’t put too much into it, punt and move on to something else. If you determine, after the fact, that it’s going to be hard to recoup your investment, you have the choice of either cutting your losses or continuing on, hoping things will get better. Sometimes it’s better to just move on and learn from it.
A great resource for software pricing is the free eBook by Neil Davidson entitled “Don’t just roll the dice!”
It’s a lot easier to sell value, because people don’t by a product, they buy a solution to a problem. We’ll look into that more in a future post.