You saw a need in the market. You developed a brilliant application to solve the problem. Now, what do you charge for it? Pricing a new software product can be a tricky thing — especially if you’re a normal, red-blooded entrepreneur and you want to maximize your income from it.
You’ve probably heard that you need to set pricing based on perceived value, not necessarily on your time or other costs to produce it. Liz Lemarchand, Chief Operating Officer of ISV marketing agency MediaDev, says, however, she struggles with that idea, because there’s so much more involved with a pricing strategy aimed at reaching your business goals. Here are five things she says to consider before you set the price.
1 Your endgame
With the excitement of launching a new product, you may be telling yourself it’s too soon to think about how you want to be positioned when it’s time to sell your company. But it’s not. Pricing a new software product can make a big impact later. “What investors want is market share,” says Lemarchand. “They want to see a viable product and a positive response from the market. That tends to put pressure on the ISV to keep prices low.”
She points out that if you have a more elaborate and sophisticated solution designed for a specific space, you may be able to charge more. However, if a competitor charges less, they may be more attractive to investors. “You could be wiped out by someone who makes a different choice,” Lemarchand says.
She comments that at least for the next 18 to 24 months, there will be ample opportunities for ISVs with proven products. “There is so much money pouring into the market, but investors are struggling to find good investments. The number of good IPOs is low compared to the money available,” Lemarchand comments.
2 Beating the clock
Timing also plays a big role in pricing a new software product. If you are the first to market with an idea that solves a big pain point for your clients, you may be able to charge more, even if it’s a relatively simple solution. “Sometimes what you offer isn’t rocket science, but the fact that the customer needs it now gives you pricing power,” Lemarchand says.
Every application has a lifecycle, however, and in the cloud era, an application’s lifespan is getting shorter and shorter. If you take a novel idea to market, there will be only a short window of time before copycats will emerge. If your strategy is only to earn income from sales of the solution, you may need to price higher in the beginning and reduce the price over time to stay competitive.
3 Your position in the marketplace
The best strategy for pricing a new software product also depends on your ISV’s position in the market. Established companies can be more aggressive and set prices higher, since they are known brands. Startups, on the other hand, may need to focus on building brand awareness, so pricing more conservatively may be the smarter strategy for them.
4 Total cost to the user
Lemarchand says you also need to consider the total costs your customers will pay to use your solution. She says to evaluate your feature set against your customers’ business needs and consider whether they will need to integrate additional functionality or incur additional costs. “More and more people are looking at total costs,” says Lemarchand. “They realize something that can appear cheaper could turn out to be more expensive.” Make sure you set your price so that the end user has the overall best deal.
5 The value of relationships
The Software as a Service (SaaS) trend has also made its mark on how the industry goes about pricing a new software product. A few decades ago, most ISVs were making their money upfront by selling software licenses. “Now it’s reversed,” says Lemarchand. “Even for ISVs who still sell traditional licenses instead of through the SaaS model, they tend to make money from a client over three to five years, rather than all upfront.”
Lemarchand says the focus on building a relationship with the customer rather than just making a one-time sale can have additional advantages. It helps you shape your product with feedback from your customers, and may enable you to charge them for new features. It also helps you establish your brand and get your foot in the door so you can offer them with additional applications. “It’s not about selling. It’s about retaining the customer,” Lemarchand explains.
Pricing’s Role in Your Business Strategy
It’s smart to approach pricing a new software product by taking a broader view than simply how much you can make when you sell your first 100 licenses. Use the price as part of your strategy to get a stronger foothold in the market, build relationships with clients, and make your company more attractive to investors.