Fog Creek Software
Discussion Board




Pricing Software

Hi,

I am having a business problem related to software: How to price your product in a special situation. Since we all are in this industry together someone else here might have encountered a similar problem or someone might be able to point me to some resource on the net.
So... I've been fairly successful with my small software company over the last two years mainly with one product. Now  we are approached by a competitor who offers a much larger product. Our product offers only a small subset of features of his but also at a much lower price.
They tell us that they are intersted in an "unlimited distribution license" for our product under their own name doing their own support.
The first problem naturally is to decide wether to cooperate with them at all. I am leaning to a "no" here but still would like to explore options. The second problem is how to set a price, either as one-off or as license royalties by unit. Any ideas?

- Claus

Claus Christensen
Tuesday, January 29, 2002

I would be very cautious (but then again I'm the paranoid kind of a guy).

You say that they already got a product which contains all your product features and more. Why don't they just strip features of their own product and bring out a basic cheap version? My feeling (based on really no information at all) would be: are they trying to pull a trick on me. It could be that you are hurting their sales and they are trying to get rid of the competition.

Make sure you don't get screwed like Spyglass when they sold their Browser to Microsoft for a royalty fee and Microsoft decided to give Internet Explorer away for free.

However, everyone is for sale. Selling an unlimited branded license would almost be like selling your product line. So I would ask a hugh one-off fee and a royalty and a minimum selling price. That will show if they are really interested.

And if you are having fun doing what you are doing I would not sell at all. Don't let greed take away the good life.

Jan Derk
Tuesday, January 29, 2002

It all depends on the licencing.  If they can distribute more of your product than you and you can gain a greater revenue from that product then it may be worthwhile.

But then they could just be buying it to kill it.  So I'd make the on contract price the equivalent of 12 months revenue that _you_ would expect to make.  Then price the individual licence at a rate which will encourage them to sell it.  After all its a dead product to you once its sold in this way.

Make sure the licence is for distribution only and in the form specificed, it doesn't include creating derivatives or amalgamating with other products, renaming or selling only part of the licenced product.

Make sure there is no reciprocal agreement that forbids you from releasing your own versions, amended as you like or changed in any way.  This is your greatest insurance policy, if you have a new release pending don't sell them the licence to that version, sell them the licence to the one that's current and don't include upgrade rights.

As with all these kinds of agreements the devil is in the detail, you need a reasonably experienced lawyer, so factor in those costs as well.

Consultancy rates available ;-)

Simon Lucy
Tuesday, January 29, 2002


If their product offer more functionality, I agree that they want you out of their way. If they have more money than you (ie, big corp) and they have a big budget for marketing, it's very likely you are going down.

Sell high. Don't even count on royalties. Try to get a lot of cash from this operation (keep the royalties clause, of course) and figure out a new product.

Regards

Anonymous Coward
Tuesday, January 29, 2002

Thanks very much for your thoughts. I mailed them about my concerns regarding a one-off payment and asked what their plans would be. This is their answer:

<<<start of their email>>>
Our plans for the <feature that my product fills> would be to remove it from <our big product name>, and bundle <your product name> or sell it separately for those that want it.

We would also like to sell your utility on our <previously thought to be independent of any vendor tech community> site.

We are open to buying it on a per unit basis - what volume pricing could you offer us? Would you then also do the support?
<<<end of their email>>>

Ok, this seems more moderate and leaves the impression that they do not want to kill our product but instead look for something to extend their product range on their lower end.
Which gets me back to the price problem: How would you calculate volume unit prices here. I am sure they will be able to reach more of the international buyers through that community website but I will also lose some sales to them.  So I guess the price must be derived from the profit though the estimated number of additional sales minus losses because of lost sales at my current price. Any thoughts are welcome.

- Claus

Claus Christensen
Wednesday, January 30, 2002

The kicker is whether you do any support or not.  As that's the most expensive part of any sale you really don't want to bear most of the costs of their sale.  So I'd only commit to fixing bugs.

In order to work out a fair price strip out all the costs that you'd be losing, distribution, support, admninistrative, add back the margin that you would expect on top of your remaining costs which include development, maintenance and a kernel cost which represents your intellectual rights.  That gives you a baseline, adjust that baseline on the projected sales that they give you.  Then give them a scale of licencing that encourages them to sell more, so the higher the volume the lower the individual licence.

Treat it as an entirely separate revenue stream, a business unit if you like.  Be wary of bundling agreements they can be used by the distributor to inflate the quantities and reduce their costs but the result is that your product disappears.

So after 12 months they say, 'Look, your product was good but people don't seem to want it now so lets renegotiate the licencing'.

I'd ignore any suggestion of a different deal for a bundled price, its up to them if they bundle it but you should price it as a separate product.  I'd also include a clause in the contract that they were responsible for maintaining the good name of the product and of marketing it as a separate entity.

Simon Lucy
Wednesday, January 30, 2002

Hi,

Interesting situation. In the name of 'Business' and for the sake of the 'Bottom Line', integrity and honesty are frequently sacrificed on the alter of the 'Free Market System'.

These conditions make it difficult to trust others when you know, or suspect, that there may be a hidden agenda.

I would pursue negotiations with this company but I would proceed with caution. I would structure an agreement that protected the intillectual ownership of my product and provided revenue based on a 'per copy', or royalty basis.

Unless you are willing to sell the product outright, do not accept any condition that will prevent you from continuing development or selling your product to a defined segment of the market.

You may want to define and segregate a market for your product for which you can provide this company exclusive marketing rights.

This would allow you to continue offering and selling your product to a defined segment of the market that is not in competition with this company and/or is not included in the defined exclusive and protected market.

This may provide you with an opportunity to expand sales in a market that you might not otherwise be able to reach or in which you can not compete.

After six months, or a year, you can re-evaluate the business relationship and re-negotiate.

SP
Thursday, October 16, 2003

*  Recent Topics

*  Fog Creek Home