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Pricing Strategy Essay

5359 words - 22 pages

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 ...view middle of the document...

Most customers tend to be enthusiastic when seeing a new product but their input is not a good indicator for real demand.
4. For enterprise software, sales numbers are too small for a statistical significant study. By the time a company has sold enough licenses, it has advanced on to a newer version or the market has changed or both.
5. For most products, there are competing products and their influence on the demand curve is hard to estimate.
6. Product life cycles are short, making comparisons more difficult.
7. Purchasing decisions are complex and are influenced my many, constantly changing factors.

When setting the price for a software product, classical economic theory comes up short. Here is an empirical, iterative method arrive at a price.

Setting the Price of Software in Existing Markets
The purpose of these guidelines is to arrive at the "right" price. This is the price that lets the company accomplish its goals for revenue, profit, market share, renewals, etc. The method detailed below will help you identify the highest price a market with existing competitor presence will bear:
1. The price of the software must be less than the ROI it provides. The smaller the ratio of the ROI to the cost of the software, the easier the sale.
2. Create a market segmentation chart based on feature sets. Identify all competing products and place them on this chart. Identify and group the value elements in the product that address the needs of each of segment. For each segment, identify the features that customers are willing to pay extra for and that differentiate your product from the competitor’s. Attach a price tag to the value of each attribute that is not identical such as:
a. The feature and functional differences.
b. The difference in brand value that customers attribute to the products.
c. The difference of cost for implementing the respective products.
d. Any other item that customers attach value to such as localization of the application, geographic proximity (for services) etc.
If the product excels in a certain aspect, then simply add that value to the price, if it lags, simply subtract the value. This step must be iterated for each competing product. The price of the software must be similar or less than that of the main competing product in each segment minus the difference in price that are justified by the functional and other aspects previously identified.
3. The price must be below the purchasing authority of the targeted decision maker signing off on the purchase.
4. The price should be outside the “Death Zone” of $5000 - $20,000.
5. The price must fit how the market perceives the product category. For example, desktop utilities – up to $50, productivity tools, up to $500 etc. If the product is priced too high, the price will become an issue. If it is priced too low, customers will perceive it as not worthy.

Setting the Price of Software in New Markets
If there are no reference products, the approach is...

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