Value Pricing

Quality software is hard to write and easy to copy. That combination doesn’t seem to sit well with some people. They focus on the low recurring costs and conclude that the software is overpriced. I’ve even known people in the software industry to be similarly deluded from time to time.

Value Pricing says that customer cost should be proportional to customer value. A rational customer should be willing to pay X in order to receive a value greater than X. Microsoft Office Professional Edition 2003 is $421.99 at Amazon. If it saves you more than $421.99 in document preparation time or document exchange aggravation, then it is a prudent purchase.

The pricing problem lies in determining how much value a customer actually accrues from any given software package. If the pricing model is too simple, then you will be undercharging customers. And if it gets too complex; then no one will understand it and many will think that you’re trying to somehow trick them.

The conventional pricing solution is to license per user. It is easy to understand. And it matches what is usually the first order value effect - value proportional to the number of people using it.

If that isn’t good enough, then the next step is to introduce different classes of users. Power users get more value than normal users who get more value than occasional users. This handles the primary objection to user pricing - I’m not going to pay X for someone who uses the software twice a month.

Sometimes you cannot differentiate users by capability. In this case, you license by some alternate measure. For example, it is common for databases to be licensed by processor. Or you might license web site related software by the site, with pricing tiers based upon the size of the site.

Bear in mind that value pricing is just a start. It defines the upper bound of what you can charge. Your final pricing model should also reflect competitive factors and revenue optimization.