More business lessons on pricing

You may want to start at the first part of this blog series.

Software Pricing makes no sense

Joel Spolsky did a great post about how software product pricing is insane called Camels and Rubber Duckies.  Go ahead and read it.  He will get you to agree with him, and then change the argument so you are left even more confused to product pricing.  It is a great article.

Extracting the Maximum Profit per User

In all business you want to extract the maximum profit per user possible.  If the user was willing to pay $15,000 for your software why did you sell it to him at $199?  Because attempting to get that type of per user maximum profit is really, really hard.  You will end up with an entire office of salesman who only take calls from people about their needs, and then try to get the most out of them.  In today’s age I don’t see how any software company can think that will work for long.  Eventually the pricing will get leaked somewhere, so people have a ballpark number.  Then if they come to you and get something totally different they will be miffed.

Big Companies should pay Big Prices

I have to agree with Joel Spolsky that having a Corporate edition at any price is a bad idea.  You will end up with a megacorp that should have paid you 10,000 developer licenses only buying that one corporate license.  You just lost a huge amount of money for zero gain.  Give them a deal, but don't give them the farm. 

We have some very, very large companies using VistaDB that only paid us around $5,000.  The costs to support such an organization are far more than what you made.  In a few cases the support was very low, but the company still got away with $150,000 or more in software for that one Corporate license fee.  Bad idea. 

It sounds good and you think you will get more people to step up into that bracket who maybe don’t usually buy at that level.  But it doesn’t work that way at all.  The people who really are in that bracket just end up getting the deal of century on your product.

Charge flat licensing, and corporate buyers should have to ask for a special price (minimum 50 units, or something like that).  Keep the pricing very flat, it makes all users think they are equal and simplifies things tremendously.

Flat Pricing with a twist

One trend I see a lot today with companies like Dev Express and Telerik is a flat all you can eat price that is supposed to be per developer.  But almost every company I talk to that uses their tools tells me they only bought one and all share it.  So those companies must be setting their prices high enough to cover this possibility, and then discounting to companies that really do buy the correct number of licenses.

Basically if your minimum price point is something you can still make a profit at you are in good shape.  It is when you are counting on scale, or making things up in volume you get into trouble.  Make sure your price is something you can actually make a profit on for each and every single customer.

StackOverflow has a site called Stack Exchange where you can host your own site likes theirs branded to be your own.  People freaked when they first saw the pricing.  It was explained as simple as you have to be able to make money on it from day 1, when economies of scale kick in (if they ever do) then you discount the software.  I like that model a lot.  Now I think they are taking on Venture Capital and trying to do some much bigger things.