Monday, March 13, 2006

Pricing your Product

Pricing your product is always a tricky thing to do, even more so in software.

A lot of business use cost + pricing, but for something like software that can be very tricky. Unless you are making custom software, your major expense (development), is not not tied to the number of units you sell. Your distribution costs are often negligible, meaning if you chose marginal cost + plus, you'd have very little hope of re-couping your development costs, or furthering them any more.

Pricing as a signal. If you can sell your product for $5, but your competitors are all charging $100, you might actually be better of selling your product for $95, since at $5 your customers may assume that there is some sort of catch.

Even more complicated is if you are entering a new market, where there are now pre-existing competitors.

If you are writing automation software, you can try basing your price of how much it will save the company. So, if your software should save people N hours of work, take N, multiply by the approriate per hour wage and multiply by a fixed constant less than 1.

If your software doesn't save people time, or make them money, then you are probably going to have a difficult time pricing your product, and probably an even more difficult time when you try to sell it.

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