TLDR Camels and Rubber Duckies by Joel On Software
Experienced opinion on how to price your software.
- When you release some software how much should you charge for it?
- Charge too much — less units you’ll sell — bad. Charge too little — less money — bad. That’s called “demand curve”. To maximise profits find the max of your revenue!
- But! Say max is $200, there could be some customers ready to pay $300 or more. How to capture that money?
- By segmenting your product! Premium version for those who’d pay $300. Cheap version for those who’re willing to give you only $100. That’s how you get them all.
- How can one do that?
- Groceries print coupons so poorer people can use them, but they sell it for the full price to those, who’s not ready to waste their time on coupons. And they put pricy branch stores near rich neighbourhoods.
- Airlines sell biz-tickets for a higher price, because you’ll be reimbursed with company money, so you don’t care. But biz-trips are usually monday to friday — no one wants to spend their weekends. So if you’re buying tickets for a trip that’ll include holidays it’s going to be cheaper. Usually)
- But big corporate purchasing depts will cheat that! They are literally specialists in procurement and negotiation, and their bonuses depend on the discount they can shake from you.
- What you really want is to max not your profits but net profit value — total sum with discounts for the whole time your client is paying.
- If you analyse pricing ranges for software — there’s two tiers:
- Cheap soft — up to $100. It’s sold with no salesforce, just from the counter.
- Costly, enterprise soft — from $50k.
- Why no gap? Because to sell something for more that $100 (which can be authorised by linear manager or alike), you’ll need client relations, and you’ll need sales people — and that costs a lot.
The joke of it is, big companies protect themselves so well against the risk of buying something expensive that they actually drive up the cost of the expensive stuff, from $1000 to $75000, which mostly goes towards the cost of jumping all the hurdles that they set up to insure that no purchase can possibly go wrong.
- But. There’s a big problem. You just can’t find out what the demand curve is for you. You can’t have focus groups and ask people — they’ll lie.
And, in fact, you can’t even be sure that the demand curve is downward sloping. If Freddy is willing to buy a pair of sneakers for $130, he is certainly willing to buy those same sneakers for $20. Right? Ha!
TLDR The more you learn about pricing, the less you seem to know.