Article: Software pricing strategies
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Software pricing strategies
Definition of Software pricing strategies
Software pricing strategy is price planning for a software firm takes into view factors such as overall marketing objectives, consumer demand, product attributes, competitors' pricing, and market and economic trends. Business Dictionary
When a firm launches a product, the pricing decision is one of the most critical decisions. Software pricing has been concentrated the internal business objectives of vendors such as costs, specified margins, and the competition.
On the marketing point of view, the goal of pricing strategy is to set a price that is the pecuniary equivalent of the value perceived by the customer in the product in order to meet the profit and achieve investment goals. [1]
Example
Effects of well timed price cuts on user base and sales of application in the Apple AppStore Full presentation by PinchMedia at slideshare.
Types of Software pricing strategies
Cost-plus pricing
The mechanism of cost-plus pricing is simply understandable. Set the price at the production cost (including direct material, direct labor, and factory overhead), and then plus a certain profit margin. [2]
As more readily available information from the cost-accounting system is relied by cost-plus software pricing, it has become the most popular method historically. Cost-based pricing strategies are focused on short-term value to the vendor. Managers in the software industry have traditionally developed their pricing strategies by over concentrated cost-based criteria at the expense of focusing on the value of the product to the customer. [3]
Value-based pricing
A value-based approach is strategic and long-term naturally as it focusing on catching unique value from each market segment through the pricing principle. It defines a price based on the customer’s comprehend value of the benefits received. Value-based pricing methodologies can be used to estimate the new software’s market value at diverse stages of the development process in addition to pricing new products for launch. [3]
On the product development process perspective, cost-based pricing follow the rule of Product -> Cost -> Price -> Value -> Customers. However, the pricing conflict reveals that valued-based approach is totally conversed, which means it emphasizes the Customers at first and Product as last.
Target Return Pricing
Target Return Pricing is a pricing method in which a formula is used to calculate the price to be set for a product to return a desired profit or rate of return on investment assuming that a particular quantity of the product is sold. MONASH Marketing Dictionary
Psychological pricing
Psychological pricing is a method of setting prices intended to have special appeal to consumers. AMA Dictionary The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £6.95. The theory is this drives demand greater than would be expected if consumers were perfectly rational. See more on Wikipedia…
Relevance to software business
Pricing is a significant strategic issue since it is related to product positioning. Moreover, pricing also affects other marketing mix elements of product features, channel decisions, and promotion.
Product positioning refers to the consumer perception of a product or service as compared to its competition. Thus positioning is what the customer believes rather than what the provider wants them to believe, and it may change because of the counter measures taken at the competition. [4]
A consumer often makes tradeoffs on quality, features and price and compares products in order to decide which to purchase. Features and price are always together considered by customers to determine which product format will provide the maximum value to meet their needs.
Example of the phenomena
In cost plus pricing, an item is priced at its cost plus some certain margin profit. For example, if the total cost of software is $350,000 and the wished profit is $100,000, the software price would be $450,000. If a profit markup is used, it should be based on the nature of the product and corporate considerations (e.g., marketing aspects). For example, if cost is $300,000 and a profit markup on cost of 40% is desired, the contract price is $420,000.
Examples of value-based pricing can be considered like computer programmers retain ownership of software and license the use of the software, or Loan brokers charge a percentage of the loan and earn more money by positioning their business around larger loans. [5]
Theoretical approaches
Earned value (EV) is a related cost-plus pricing concept that is used for tracking adherence of a software project to the original project budget. [6]
Conjoint analysis or trade-off analysis is one most often used technique to measure perceived value [7]. This technique enables managers to compute the utility functions of consumers for individual variables and to understand how they are combined, traded off, and otherwise valued. [8]
Currently interesting research questions
How to treat pricing as a potential strategic opportunity?
How to choose or define a suitable pricing method for a software firm?
Links to related articles
Pricing discrimination technique
Price competition between online firm and conventional offline firm
See also
Software Pricing: Getting Back to Growth
Recommended reading
Bakos, Y. and Brynjolfsson, E. 1999. Bundling Information Goods: Pricing, Profits, and Efficiency. Management Science, 45(12): 1613-1630.
Bhargava, H.K. and Choudhary, V. 2001. Information Goods and Vertical Differentiation. Journal of Management Information Systems, 18(2): 89-106.
Chun, S-H. and Kim, J-C. 2005b. Pricing strategies in B2C electronic commerce: analytical and empirical approaches. Decision Support Systems, 40(2): 375-388.
Davidson, A. and Simonetto, M. 2005. Pricing strategy and execution: an overlooked way to increase revenues and profits. Strategy & Leadership, 33(6): 25-33.
Macher, J.T. and Mowery, D.C. 2004. Vertical Specialization and Industry Structure in High Technology Industries. In Baum, J.A.C. and McGahan, A.M. (Eds.). Business Strategy over the Industry Lifecycle - Advances in Strategic Management, (21): 317-358. New York: Elsevier Press.
Nalebuff, B. 2004. Bundling as an Entry Barrier. Quarterly Journal of Economics, 119(1): 159-187.
References
- ↑ G. D. Kortge and P. A. Okonkwo, "Perceived Value Approach to Pricing," Industrial Marketing Management, vol. 22, pp. 133-140, 1993.
- ↑ Scott Allen, Pricing Methods, About.com
- ↑ 3.0 3.1 Harmon R., Raffo D., and Faulk S., Value-Based Pricing For New Software Products: Strategy Insights for Developers
- ↑ John Bradley Jackson, Product Positioning Strategies
- ↑ John C. Kelly, PhD, SCORE Counselor Value-Based Pricing - Moving Beyond the Hourly Wage
- ↑ B. P. Lientz and K. P. Rea, Project Management For The 21st Century, Third ed.San Diego: Academic Press, 2002.
- ↑ R. Kohli and V. Mahajan, "A Reservation-Price Model for Optimal Pricing of Multiattribute Products in Conjoint Analysis," Journal of Marketing Research, vol. 28, pp. 347-54, 1991.
- ↑ M. Crawford and A. D. Benedetto, New Products Management, Seventh ed. NewYork: McGraw-Hill Higher Education, 2003.