Avoid delusional pricing
August 22nd, 2006 by 
Chris Harris
I found a very interesting post/rant about pricing software as an independent developer. It’s an interesting read if you’re in the software business and you have a few minutes. The basic dilemma is how to price software that you’ve just written. Having been exposed to the pricing discussions at even decent sized software companies, it amazes me how little “science” goes into pricing (unless you’re in retail). Therefore, it amazes me when companies (new or old) start talking about pricing they immediately want to know the same thing - What will it cost to produce this?!?
The question about whether it costs you $1 or $10 to make your widget is irrelevant in determining how much someone else will pay for it. What matters is the how else the person can get whatever it is you’re offering! Economics tells us that pricing depends on the customer’s alternatives. If you sell cars as a means of transportation, then your customer’s alternatives are plentiful: planes, trains, busses, walking, bicycles, even taxis. If you sell cars as a status symbol, your competition becomes: Rolex, boats, and even houses. Once again, we see that alternatives is what matters, not just competitors, not your cost to produce, and certainly not any sunk costs in R&D you’ve made. Coke and Pepsi learned this when juices, sports drinks, energy drinks, and bottled water started eating into their market (for gulps!) a few years ago! Certainly costs matter to a company. When you compare them to the prices the difference has to be favorable for you to want to continue in that business. However, if you start a pricing discussion with costs in mind, you’re heading down a troubled road. Psychologically you’ll find it much easier to rationalize and justify that your customers will pay your target price once you know that you “have to hit it.” Alternatively, I recommend the opposite.
Start with your customer’s alternatives - then narrow in on a price range. Now go find a way to manage your costs to meet that price range. If you can’t get there, then abandon the project. If you can, I like your chances!
Posted in Innovation, Technology | 