Pricing Strategy
Table of Contents
1. The Need for Pricing 2. Pricing Software Industry Products 3. Licensing 4. Pricing Discrimination 5. Bundling 6. Other Pricing Issues 7. Summary
The Need for Pricing
Pricing has far reaching effects beyond the cost of the product. Pricing is just as much a positioning statement as a definition of the cost to buy. Price defines the entry threshold: who your buyers are and their sensitivities, which competitors you will encounter, who you will be negotiating with and what the customers’ expectations will be. Good pricing will remove the price issue from being an obstacle to a sale. Pricing is also used as a weapon to fight the competition as well as gray markets. Pricing is unique from other marketing decisions for several reasons:
• Price is the only marketing element that produces revenue. All other marketing decisions produce costs.
• Pricing is the most flexible marketing decision.
• Pricing reflects a product's strengths and weaknesses. It implies value as well as positioning.
• Pricing has the most immediate impact on the bottom line. In the high tech industry, a 1% increase in prices can lead to a 10% (or more) increase in profit. This is twice the effect that the same change in volume, fixed or variable costs have on profits.
Pricing Software Industry Products
When it comes to Pricing Software, “Economics 101” is not applicable. There are many reasons for this:
1. Supply and Demand curves are based on the assumption that the marginal cost for manufacturing additional products is non-zero and that it decreases with quantity. In the software industry, the marginal cost for an additional copy of software is zero.
2. Estimating price elasticity for a specific product is practically impossible. Hence, pricing decisions cannot be based on supply and demand curves.
3. Estimating the potential market for a product is possible but estimating demand is problematic. Most customers tend to be enthusiastic
1. The Need for Pricing 2. Pricing Software Industry Products 3. Licensing 4. Pricing Discrimination 5. Bundling 6. Other Pricing Issues 7. Summary
The Need for Pricing
Pricing has far reaching effects beyond the cost of the product. Pricing is just as much a positioning statement as a definition of the cost to buy. Price defines the entry threshold: who your buyers are and their sensitivities, which competitors you will encounter, who you will be negotiating with and what the customers’ expectations will be. Good pricing will remove the price issue from being an obstacle to a sale. Pricing is also used as a weapon to fight the competition as well as gray markets. Pricing is unique from other marketing decisions for several reasons:
• Price is the only marketing element that produces revenue. All other marketing decisions produce costs.
• Pricing is the most flexible marketing decision.
• Pricing reflects a product's strengths and weaknesses. It implies value as well as positioning.
• Pricing has the most immediate impact on the bottom line. In the high tech industry, a 1% increase in prices can lead to a 10% (or more) increase in profit. This is twice the effect that the same change in volume, fixed or variable costs have on profits.
Pricing Software Industry Products
When it comes to Pricing Software, “Economics 101” is not applicable. There are many reasons for this:
1. Supply and Demand curves are based on the assumption that the marginal cost for manufacturing additional products is non-zero and that it decreases with quantity. In the software industry, the marginal cost for an additional copy of software is zero.
2. Estimating price elasticity for a specific product is practically impossible. Hence, pricing decisions cannot be based on supply and demand curves.
3. Estimating the potential market for a product is possible but estimating demand is problematic. Most customers tend to be enthusiastic