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I am currently developing a software and planning to sell it as a downloadable product. There are already competitors on the market out there and their pricing is too low. What I think is that the software I am developing will help my customers a lot and save time (and enough unique selling points compared to competitors'). When I make a pricing calculation based on the time my product saves for my customers, the result is much higher than what competitors' prices, something like $400 to ~$60. So my question is, entering a competitive market with higher pricing is a suicide?

Thanks for the thoughts!

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migrated from programmers.stackexchange.com Oct 8 '11 at 20:24

4 Answers

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The price that your competitors charge is only one of many signals that you should consider when setting a price. I think it's good that you're focusing on the value that you're bringing your customers. As other have pointed out, that can be hard to quantify, but it's still very important.

I'd say there are five important factors that determine any startup's price:

1. Cover the costs of production. This includes the salaries of your engineers and your average cost of customer acquisition, including marketing and sales costs. At minimum, your price should cover these costs.

2. Charge for the value you're brining to customers. This is something a lot of startups ignore. If you're offering a product or service that bring substantial value to your customers, make sure you charge for that. Consider using a pricing structure that lets you extract more values from customers as they get more benefit out of your product, like charging for each additional user/login on a corporate account.

3. Consider what your competitors are charging. This can help, but it can also hurt. If you're going to be charging substantially more than your competitors, you need to know why. And you need to be able to explain why to your custom when they inevitably ask during the sales process. Plan ahead for this.

4. Consider economic signals. As others have mentioned, high prices can indicate high quality. I've heard stories of several startups who were more successful after raising prices -- without substantially improving their product. If what you're offering is a premium service, you should compete on quality, not prices. And in most cases, higher price points imply higher quality. Use that to your advantage.

5. Make the price relatable. The only way you'll ever make a sale is if you can convince your potential customers that the value of your product is higher than the cost you're charging. Humans can be surprisingly irrational when it comes to judging value. Put the cost of your product in terms that are relatable to them.

A great example of this was JibJab raising their price from $9.99 per year to $12 per year and seeing their conversions go up -- now their product was "only a dollar a month!" which seemed like a better deal since the price was more relatable.

I wrote about most of these factors in this blog post:

http://blog.hartleybrody.com/2011/09/the-5-essential-factors-to-determine-your-products-price/

I'd encourage you to do some experimenting to see what works best for your company in your industry. It's a very specific and sensitive issue for any business and it's hard to offer one-size-fits-all advice.

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I think I am going to try to be the expensive one on the market but not an expensive empty bottle. With good documentation, good support and good presentation, I think there is a chance. Also I am thinking about limiting my target customers. For example, my software will not run on any server. will have very very specific requirements which in result will limit my market BUT I believe with these specific requirements I will be able to provide a better product which in turn increasing the customer satisfaction. Thank you Hartley. – matte Oct 9 '11 at 23:19
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The question is purely about marketing. You can successfully sell a product at $1 000 while the competitors sell their product at $30. Just because you use correct marketing techniques, proper advertisement, attractive packaging, etc.

If Windows is still the most used operating system while Linux is free, do you believe that the only reason is that Windows is so much better (by the way, better for who? to do what? how to evaluate which one is better? based on what criteria?)?

If you are targeting bad the customers of your product, and you don't have people with marketing skills in your company, this would be a suicide. You can even distribute your product for free, nobody will use it.

When I make a pricing calculation based on the time my product saves for my customers

The price of a product is measured from a bunch of elements:

  • the overall cost (cost of development, management, future support, marketing, etc.),
  • the delivery cost,
  • the number of expected customers (if, as a freelancer, I'm doing an e-commerce website for one customer, the price will be $2 000 or higher; if I'm doing an e-commerce website I want to sell to thousands of customers, chances are that the price will decrease to a few tens of dollars),
  • the importance and reputation of your company/trademark (a perfume from Dior can have a much higher cost than the same perfume from an unknown company which just started),
  • the influence of a higher price on the customers (if a company will find a way to sell high quality PCs for just $100, few people will buy them, because they will think those PCs are a cheap crap),
  • the chances to get additional money from the services around the product (you can distribute the software for free if you know that you'll make enough profit on consulting, paid support, etc.),
  • etc.

Personally, I never saw the productivity gain be taken in account in marketing studies. Maybe because you can't objectively measure it. What is the actual productivity of your customers? How do you measure it? How do you measure the gain? Are you sure that the features you implemented to be more productive will actually be known and used by your customers?

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In addition to saving my customers' time, my product will cut the cost of hiring a web developer. So, when pricing my product, I also think about the average hourly rates of web developers. Also I think pricing your own product higher than the market is a stance, am I right? As you have said, better presentation, better experience during pre-sales and after sales will be my powerful sides. – matte Oct 8 '11 at 19:28
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Since this is a serious issue, you should consider reading these books:

Don't Just Roll The Dice - A usefully short guide to software pricing

Software Product Management and Pricing: Key Success Factors for Software Organizations

Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table

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What are some good high-level points that could be summarized from those three resources? – Kenny Evitt Oct 13 '11 at 2:50
up vote 1 down vote

"When I make a pricing calculation based on the time my product saves for my customers, the result is much higher than what competitors' prices."

But the value of time isn't objective.

People will spend a half-hour driving around to find 3 cents less for a gallon of gas and save $5.... they value themselves at $10 per hour.

Websites are even a worse example. I get calls asking me to take a few hours to 'spruce up a website I made for my own business'. Total time they invested? 60+ hrs. If I cost is $1200 that's $20 an hour self-value.

So if the premise of your marketing (and it is) is that 'people are rational' then that just won't work. There are endless articles on the web about the reluctance of people to change their mind despite (what you think is) hard evidence.

The folks that charge $60 do so because a web app is a gallon of milk and folks don't pay $25 for that even if it's demonstrably better. To me (and most others), a piece of really good shareware is $15-$20. An app does does it all, Photoshop, MSWord, etc. is a $99-$499 gallon of milk. So an app that does one specific thing well is perhaps to me in the realm of $25-$50.

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I understand your point @Randy. When I think about the software I purchased (and satisfied both with the solution and the price), all of them are under $70 line. So I guess, you are right, the time saved and the cost of that time is irrelevant with pricing. – matte Oct 9 '11 at 15:36
But after reading Hartley's answer, I think that's the spirit I am looking for :) answers.onstartups.com/questions/31217/… – matte Oct 9 '11 at 23:20
Well I also like what Hartley says...especially #3. But I didn't say it was irrelevant, I said it's hard to objectify. If you have a mill press that's 25% faster that's easier to objectify. But if you say 'cut your time to get organized in half' automatically there's resistance because it's instantly assumed there is an investment of learning curve. – Randy Oct 10 '11 at 0:57

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