The Old Joel on Software Forum: Part 4 (of 5)

What is ethical pricing?

What do you consider ethical in terms of pricing a product or service.

Let's say you can write a program, and all costs (your time, computer, office rent, etc) costs you $100. You can sell this product only 1 people, it's a very special one.

How do you determine the price? Do you use an average margin? What if the customer is willing to pay $5000 for this product. Do you feel OK to sell a $100 product for $5000. Or is it something which exploits the weakness of the buyer?

Sunday, April 4, 2004

The ethical way to price is to price to value. That is, you should charge something less than the value that your customer receives from using your product or service.

A simple way to think about pricing is calculate the Mean Time to Payback. Put all the costs associated with using your product in the numerator. Costs include the costs of your product, the cost of things your customer will have to buy to use your product (example: new hardware), the costs of training, the cost of time lost to the customer has he or she gets familiar with the product, etc.

Put all the benefits of using your product in the denominator. Benefits include increased revenue from using your product, cost savings from using your product, etc.

The Mean Time to Payback (MTP) equation looks something like this:

MTP = (Costs of Using Product) / (Benefits from Using Product)

You should do everything you can to drive your mean time to payback as close to 0 as possible.

A good article about pricing can be found here:
http://www.fastcompany.com/online/68/pricing.html

Aside from mean time to payback, you also need to consider the price of alternatives your customer has. Most of these alternatives come from competitors, but a customer (almost) always has the option of not using any product. So remember that you are also always competing with the option of buying nothing.

I built a simple simulation that examines how the price of alternatives affects the price you can charge for a product and how, in some cases, it makes sense not to lower your price:
http://www.forio.com/pcpricesim.htm

This simulation looks at laptop pricing from Dell vs. computers offered by HP, but can be adapted for other situations.

Michael Bean
Sunday, April 4, 2004

Ethical pricing? Unless you're selling a kidney, I do not think it applies. People have the option to buy from you or pay someone else to build it. In a market economy, you can price at the highest level you can get someone to pay.

If the price is too low for you, then you will not do it again. If it is too high for the customer, they will not.

I guess I just don't see the ethical dilemma.

MSHack
Sunday, April 4, 2004

I'm with the previous poster; I don't see how ethics comes into play when pricing software development.

The price you want is the price that will maximize your profits. Naturally, the trick is figuring out this price. It's going to be specific to your industry and coming up with this price is likely going to involve a decent amount of market research and analysis.

Mark Hoffman
Monday, April 5, 2004

Ethical pricing is the most people are willing to pay.

Anon to protect the guilty
Monday, April 5, 2004

You charge that SOB every last penny he's got, since statistically he is incredibly likely to be a selfindulging egocentric moron. Since you even ask the "ethics" question you are statistically more likely to be more "ethical" than him, so your power over spending his fortune will be ethically correct.
(Unless you have two X chromosomes, in which case you will blow it all on child labor produced designer shoes and handbags and body camouflage extracted from pretty furry animals without anaestetics).

Just me (Sir to you)
Monday, April 5, 2004

> he is incredibly likely to be a selfindulging egocentric moron

Having a bad day?

Monday, April 5, 2004

Since the "badness" of my days is in direct positive correlation to my JoS posting habit, you can use http://www.usabilitymustdie.com/jos/WW_DNA.html as a direct graph of my mood. The ones with 0 posts by me are sort-of-ok days, and it goes downhill from there.

Just me (Sir to you)
Monday, April 5, 2004

You have sort-of-ok days? Lucky goit.

Monday, April 5, 2004

Speaking as a selfindulging egocentric moron, I consider it reprehensible that someone like you would consider taking advantage of me.

name withheld out of cowardice
Monday, April 5, 2004

My conscience is clear :-).

Just me (Sir to you)
Monday, April 5, 2004

best pricing.

Grab customer by ankles. Shake him for all he has. That is the purchase/licence fee. Than slap on another £100k or 25% annually as support fees.

Tapiwa
Wednesday, April 7, 2004