Thursday, 21st March 2019

How do you determine the price of software?

Developing a good pricing strategy is an art and doing it well can have positive results on a business’s revenue. Even just small tweaks made to the pricing for current products will have more of an impact on revenue than any big-spend marketing push. By Dan Wilkinson, Paddle.

So how do you decide what to charge for your product? With thousands of pieces of software launched or updated each year, you certainly need more than a ‘finger in the wind and add 10 percent’ approach.

We’ve learnt a thing or two from our community on developing an effective pricing strategy around new product launches, version updates and expansion into new markets. The purpose of this article is to share some of these insights into developing a software pricing framework for you.

Value-based pricing is your best approach

When it comes to launching a new product first impressions count for everything. Cost remains a key factor in a decision makers choice to purchase or not, so your pricing strategy is important.

A simple cost-plus pricing strategy, where costs are calculated simply and a margin is added on top, may work in the early days but once the business grows this strategy won’t last. Alternatively, trying to keep inline with your competitors pricing means you’re essentially following someone else’s business strategy and doesn’t allow you to step beyond them to charge an amount that your product is worth

Value-based pricing offers the most efficient way to find your product price. It follows an ethos that your product’s cost is relative to how much your customer believes it’s worth. The strategy’s strengths come from its approach:

●It’s product oriented and focussed on value delivered to the customer

●Its flexibility enables A/B testing and optimisation

●It’s dynamic, and enables bundling, bolt-ons, upgrades etc., to change the price as your product evolves

By adopting value-based pricing, a business can start at a higher price point and if you increasingly delivering value you can reasonably raise prices gradually.

Implementing a value-based pricing strategy relies on you doing some homework - understanding who your ideal customers are, talking to existing customer to find out their views and pain points and defining persona silos that take into account customer pain points, perspective, routines etc.

With your personas created, you can gauge their readiness to pay a certain price - possibly more than your competitors. This means your product has to reflect the needs of what customers actually want, whilst also having features and product updates they’d be willing to pay extra for. If you believe your software adds more value than your competitors, then you should reasonably charge more for that added value.

It’s worth noting that although the persona defines the expectations of your ideal buyer, you also need to pitch your product to your market. It’s a balancing act between what you think it’s worth and what the market is willing to pay.

Value-based pricing will be the best representation of what people are willing to pay for your product. However, knowing the value of your product from previous launches will definitely inform how much customers are willing to pay, backed up by the customer personas.

If this is your first launch, you may need time to build up these personas as value-based pricing requires research. You should also beware of pricing yourself too high, as you could be undercut in price unless you offer substantially more value than your competitors.

And finally…

The value-added, customer-based approach is only the tip of the pricing strategy iceberg. There are so many more factors to consider such as promotions, discounts and new major version upgrades that will have knock on effects on pricing. However, having a clear strategy that takes into account the product, the market and the customer is critical to it all.

Paddle’s comprehensive guide to software pricing strategies is available at https://paddle.com/blog/new-launch-choosing-the-right-pricing-strategy/

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