Software pricing: Take a look before you leap!

If you're a services company that's anxious to turn a reusable piece of code you developed into a product, one of your greatest challenges will be determining an appropriate price for your product. When you start thinking about how to determine the price, you'll probably naturally move toward cost-based pricing (a formula that is related to your development costs), or competition-based pricing (a formula related to what your competitors charge). Before you settle on a price using either of those basic pricing models, go back and reassess the opportunity for value-based pricing, especially if your product has a strong vertical market affinity.

Value-based pricing requires that you be attuned to your potential customers and how they'll really use your product. Your competitors may not have used a value-based pricing model, so there may be an opportunity to define a new model that will mean higher profits for your company. Using informal survey techniques at industry trade shows, or even a focus group, you may find that your competitors' pricing models have created substantial pockets of would-be users who cannot effectively relate to the existing pricing model. For example, the product may be unaffordable for businesses with a certain number of users, or a certain number of daily transactions. Perhaps the up-front charges on the software are a barrier-to-entry for businesses of a certain size. Perhaps there are many businesses who can't use 50% of the functions provided by your competitors, and simply aren't willing to pay the price for functions they won't use. It's not uncommon to discover that customers are willing to pay your company more, maybe without even realizing it, as long as your fees match the structure or nature of that particular business. Decision-making can often be linked to simple and realistic calculations of the value that might be received by using a product.

There are a wide variety of approaches, some of which can be used in conjunction with one another, that can be used when you create a value-based pricing structure. These include user-based licensing, usage- or transaction-based licensing, site licensing, function-oriented fees, support-based fees, customization fees, customer revenue-based fees, and even leasing options. Needless to say, the pricing analysis can be an enlightening experience. Don't presume that one model is sufficient; you may need to have different pricing models to reach different parts of your intended market. Do be careful about creating models that will turn into an accounting nightmare if you're successful. But don't be afraid to define a totally new pricing model. If you've created a situation where your company makes money and the prices make sense to your intended customers, you're probably on a very sound path. (It's called win-win!)

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