Rating: +0
Munish,
Pricing is obviously complex and there are lots of "what if's on unknowns" and more tangible expense lines that you have to consider, but to try and break it down into some of the major component pieces.
First off if you ever sold or bought a house, you know that the value of a home is often determined based on what they call comps (comparison values) or the selling price of the last few homes in your neighborhood that are similar in size and features to yours; if you are pricing a software product that is an entry into an existing market, then you also have comps or market comparisons which in some respects determine, at least at a broad brush level, your price points. If you’re selling new spreadsheet software, and the leader in the spreadsheet market is sold at 400USD then you know what the consumer market is bearing for that product set. In order to charge more than 400USD you need to have a unique value proposition over and above the current market offering; and this may not be a software feature battle, but possibly a higher level of service and customer support for example. There are lots of ways to extract a higher-dollar value. That's one factor, comparative market pricing. Another is taking a look at your maintenance expense, after you sell the software, as perpetual license, you are now funding an 800 telephone number for live support, offering SLA’s for response times, and dedicating full-time staff for support, and development staff to responding to bug fixes, etc. Depending on the code base, you can often extract an average bugs per line of code, then apply a fix time for each bug and then begin to extrapolate your anticipated cost for bug fixes post-sale. This is an area where speculation and what if’s come into play, you need to be able to forecast your sales, and back out your maintenance expense line, and then adjust your street selling price (street price, is your suggested list after a discounts), and then add back your annual maintenance fees to determine if your software maintenance is a profit center, a break even cost of doing business, or a hole in your back pocket. And before that you should determine which of the three you want to be. It may be part of the business plan to run maintenance as a break even vs a profit center, although note that maintenance is the life blood of software sales, not the license sale. So now you have two of many pricing considerations; existing market comparisons, or what does the market already bear for the value proposition that you are proposing; and one expense line which is your software maintenance; the third area is your overall cost of R&D, which similar to your maintenance expense, however this can be your major cost factor. Your overall R&D expense should be a consideration in determining your software price. You have to ensure, using your sales projections, that you are covering your R&D, through license sales and software maintenance. Your target margins on software for perpetual license sales should range between 75% and 95%.
And a note on different pricing models; there are many different models for pricing today. Traditional license sales, is no longer very traditional as companies use pricing as differentiators in their sales cycles to win deals. It makes sense, that in a mature software sector, that if two or three products can all adequately “do the job” then the purchasing decision can come down to price and creativity of the company trying to sell. You’ll see subscription, or lease rental models, SaaS pricing if your software is built ala/Salesforce.com; maintenance only, where you provide the base software for free and charge only for maintenance and support (if the customer signs up), and value added features that are not part of the base product, etc. There are lots of models, which you need to consider and be ready to offer in the event that you need to get creative against your competition.
Good Luck,
Peter
May 2008