Fog Creek Software
Discussion Board




Pricing

I am wondering if any of you has experience with setting prices for your products.  I don't have a solid model of my market that I can use to seek an optimum pricepoint, and estimating the parameters needed to build such a model would likely be wildly uncertain at best.  I'd like to avoid putting something out there and then adjusting the price up and down to learn the proper price point by trial and error.  Any advice?

confused salesman
Monday, November 25, 2002

Good  question. You should consider these things:

How about taking a look at other products in the industry that you compete with, and then do a feature compare.

The time, resoucres you have spent on the product.

When do you intend to break even?

I am sure there are a lot of people who have shipped commercial software in this forum, who will give you a better idea.

Prakash S
Monday, November 25, 2002

Time spent, resources expended, and break-even goal shouldn't affect the price.  Your customers don't care about any of this.  You should set the price to maximize revenue.  (Of course, in practice, it can be hard to determine this price point.)

.
Monday, November 25, 2002

If possible, test the market. Try out different prices, in different ads or different regions.

What do I know
Monday, November 25, 2002

I disagree with the post that says one should only be concerned with maximizing revenue.

Agreed, the customers don't care about any of this, but maximizing revenue is not the "be-all, end-all" to this equation.

Consider the scenario where the immediate goal is market share oriented. In this case revenue amounts to didley-squat. He may want maximum market penetration, and revenue (in the short-term) might not matter.

Jason W. Paul
Monday, November 25, 2002

Also, it depends on the "volume" of product you intend to ship. If you're only going to ship 1 unit and it represents years of work then the price should be high.

OTOH if you're in the lucky position of being able to sell tens of thousands then the price adjusts accordingly.

Alberto
Monday, November 25, 2002

You need to know your market and what they normally pay for products like yours. I've known cases where a product price was increased 50 times as a result of this research, and the product was very successful.

Similarly, if your product provides some really narrow functionality that's very important for wealthy businesses, then they will pay amounts you wouldn't dream about.

Must be a manager
Monday, November 25, 2002

the last comment is true. as I try to figure out how to eke out more than $40K doing scientific computing, my friend in NYC makes about $250K writing extensions to outlook for financial corps and hospitals in NYC. speaking of NYC, it would be interesting to see the percentages of fog creek's income coming from product sales vs. consulting...

iHeartNY
Monday, November 25, 2002

Marketing 101 pricing strategies:

Cost plus:  What it cost you to produce, plus a little extra. 

Skimming:  Jacking the price up on innovative products.  What occurs when new technology is introduced.

Penetration:  Low pricing to penetrate the market.

Price/quality:  Price of the item influences the perceived quality of the item. 

Meet competition:  Used mainly for commodity products.  You charge what the other guy is charging.

Meet profit goals:  self explanatory.

Price elasticity of the buyer:  Smokers buying tobacco tolerate price increases more than gum chewers buying gum.

It really depends on your business plan as to which strategy to choose.

brother
Monday, November 25, 2002

I've had to price a half dozen products and the first thing I try to do is consider how much I would pay for the product given the benefit of the product, the proposed license agreement and the support services offered at that price.

It is far easier to figure out what you would pay for a product than to try and figure out what others would pay.

There are other factors that usually get applied, but that is what I start with (and it is what I end with, because no matter what other formulas do to the price, I still have to believe that it is a product I would buy at that price.)

If you feel strongly that your income is very different than the bulk of your target audience's income, then you may need to take that into account.

The first product I ever priced I tried to figure what other people would pay, and as a result, I had to fiddle with the price two times over the course of the first year because I had it wrong.  The first adjustment was 50% reduced (desperation), the second adjustment was a 20% increase because sales were strong, but it was difficult to cover support costs.  Sales continued even stronger after the price increase.

Since then, I have set the price of 5 more products and, using the basic method above, they have been good sellers at the original price without making adjustments.

Anyway, the bottom line is you are looking for the price that the market will bear.  What if the market price can't support the cost of development and support?  Well, that is why companies fail.

My only other two peices of advice are:  Try not to change your price unless you have 6 months worth of data at the current price.  When setting your price , if it sounds like it might be a bit low, remember that you can always increase your price later without looking bad.

Torment
Monday, November 25, 2002

1. Rate your competitor's products.

2. Create a best fit curve in Excel for your competitor's products given the two variables:  product rating and price

3. Rate your own product relative to your competitor's products.

4. Find the price point on the best fit curve found earlier given the rating on your product, and adjust the price from there.

The hardest part about this is, of course, the rating part.  Any ideas on essential factors to include when rating a software product?

HeyMacarana
Monday, November 25, 2002

Estimate how much money (time included) your product will save your customer. Divide that by two and you have your number. If that doesn't cover your costs, you've chosen the wrong niche.

.
Monday, November 25, 2002

HeyMacarana:

YOu have a link to that?

Prakash S
Tuesday, November 26, 2002

Thanks to all for the responses.  Sounds like it's as complicated as I thought :)  Think I'll have to do some research, but this material will certainly be useful in starting in the right direction.

confused salesman
Tuesday, November 26, 2002

Also remember that in a lot of customers' minds price also says something about quality.  If you're 50% below your competition in price, then they may think that the quality of the product is not as good.

Jonathan A.
Tuesday, November 26, 2002

If you'd care to read up on the subject, the following book is excellent:

http://www.amazon.com/exec/obidos/tg/detail/-/013026248X/102-1854524-9936957

The language is often dense and it's mathematically oriented, but if you want to develop a robust model of your market and an effective pricing strategy to apply against it, this book is excellent.

jim rigney
Tuesday, November 26, 2002

Unfortunately, this world (I'm talking about Planet Earth) isn't working according to expectations, and a big chunk of the commercial products on the market, are available for free, given that some "wouldn't mind" using a cracked piece of work.

I'm not experienced with the pricing question, but you might want to consider the above "problem" when thinking about pricing.

Baruch
Friday, December 13, 2002

*  Recent Topics

*  Fog Creek Home