Pricing Strategy

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Table of Contents

1. The Need for Pricing
2. Pricing Software Industry Products
3. Licensing
4. Pricing Discrimination
5. Bundling
6. Other Pricing Issues
7. Summary

The Need for Pricing
Pricing has far reaching effects beyond the cost of the product. Pricing is just as much a positioning statement as a definition of the cost to buy. Price defines the entry threshold: who your buyers are and their sensitivities, which competitors you will encounter, who you will be negotiating with and what the customers’ expectations will be. Good pricing will remove the price issue from being an obstacle to a sale. Pricing is also used as a weapon to fight the competition as well as gray markets. Pricing is unique from other marketing decisions for several reasons: • Price is the only marketing element that produces revenue. All other marketing decisions produce costs. • Pricing is the most flexible marketing decision.

• Pricing reflects a product's strengths and weaknesses. It implies value as well as positioning. • Pricing has the most immediate impact on the bottom line. In the high tech industry, a 1% increase in prices can lead to a 10% (or more) increase in profit. This is twice the effect that the same change in volume, fixed or variable costs have on profits.

Pricing Software Industry Products
When it comes to Pricing Software, “Economics 101” is not applicable. There are many reasons for this: 1. Supply and Demand curves are based on the assumption that the marginal cost for manufacturing additional products is non-zero and that it decreases with quantity. In the software industry, the marginal cost for an additional copy of software is zero. 2. Estimating price elasticity for a specific product is practically impossible. Hence, pricing decisions cannot be based on supply and demand curves. 3. Estimating the potential market for a product is possible but estimating demand is problematic. Most customers tend to be enthusiastic when seeing a new product but their input is not a good indicator for real demand. 4. For enterprise software, sales numbers are too small for a statistical significant study. By the time a company has sold enough licenses, it has advanced on to a newer version or the market has changed or both. 5. For most products, there are competing products and their influence on the demand curve is hard to estimate. 6. Product life cycles are short, making comparisons more difficult. 7. Purchasing decisions are complex and are influenced my many, constantly changing factors.

When setting the price for a software product, classical economic theory comes up short. Here is an empirical, iterative method arrive at a price.

Setting the Price of Software in Existing Markets
The purpose of these guidelines is to arrive at the "right" price. This is the price that lets the company accomplish its goals for revenue, profit, market share, renewals, etc. The method detailed below will help you identify the highest price a market with existing competitor presence will bear: 1. The price of the software must be less than the ROI it provides. The smaller the ratio of the ROI to the cost of the software, the easier the sale. 2. Create a market segmentation chart based on feature sets. Identify all competing products and place them on this chart. Identify and group the value elements in the product that address the needs of each of segment. For each segment, identify the features that customers are willing to pay extra for and that differentiate your product from the competitor’s. Attach a price tag to the value of each attribute that is not identical such as: a. The feature and functional differences.

b. The difference in brand value that customers attribute to the products. c. The difference of cost for implementing the respective products. d. Any other item that customers attach value to such as localization of the application, geographic proximity (for services) etc. If the product...
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