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Pricing of Software Products

Pricing of Software Products

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Published by: Krishnamurthy Prabhakar on Jun 05, 2011
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1Submitted on 5-December-2010
Pricing Strategies in Indian Software Industry
Dr.K.Prabhakar,Velammal Engineering College,Velammal nagar,Redhills road,Chennai-600066.prabhakar.krishnamurthy@gmail.com _______________________________________________________________________
 
Abstract
This paper gives a basic outline of pricing strategies of software products adopted by twosoftware majors in India, which will be a starting point for further study on pricingstrategies. It examines strategies used by Infosys and Wipro especially value based  pricing. As a starting point to understand, pricing strategies of 
 
 fast moving consumer goods is provides for better appreciation of differences in buying software to that of fast moving consumer goods. This paper is meant for basic understanding and not anempirical study.
________________________________________________________________________
 
1.
 
Introduction
 
Software pricing strategy plays a significant role in augmenting software marketsales. It can be interpreted as an important tool in the marketing toolbox which acompany needs to consider before launching a product in the market. The managerialgroup in the software industry has conventionally improved their pricing strategies basedon cost related criteria. Cost-based pricing strategies concentrate on the product value tothe customer. Furthermore, they are also focusing on the short-term value to the vendor.On the other hand value based pricing is based on the customer's understanding of thevalue of the product. Value based pricing strategies pays attention on innovating long-term value for the customer.Aim of pricing strategy is to set a price that the customer sees in the product whilemeeting profits on investment goals. This paper presents a comprehensive view about theconventional cost-based approaches to software pricing; these ideas to software pricingare short-term and place the seller’s interests over the interests of the buyer. On the other
 
2hand, pricing approaches are based on customers perceptions of value are planned andlong-term in nature. This is due to the fact of capturing unique value from each marketsegment through the pricing mechanism.Furthermore, software firms need to invest to make sure long-term benefits of value-based pricing is discussed. The investment of software companies in a strategicpricing helps in making quality decision making about the product during the productdevelopment cycle. Moreover, it also provides good understanding about how customersvalue price alternatives and come up to prices that they are willing to pay. As a startingpoint a primer on pricing in fast moving consumer goods segment is studied.
2. Pricing Strategies in Fast Moving Consumer Industry
 
2.1 Premium Pricing
Use a high price where there is uniqueness about the product or service. This approach isused where a substantial competitive advantage exists. Such high prices are charge forluxuries such as Cunard Cruises, Savoy Hotel rooms, and Concorde flights.
2.2 Penetration Pricing.
The price charged for products and services is set artificially low in order to gain marketshare. Once this is achieved, the price is increased.
2.3 Economy Pricing
This is a no frills low price. The cost of marketing and manufacture are kept at aminimum. Supermarkets often have economy brands for soups, spaghetti, etc.
2.4 Price Skimming
Charge a high price because you have a substantial competitive advantage. However, theadvantage is not sustainable. The high price tends to attract new competitors into the
 
3market, and the price inevitably falls due to increased supply. Manufacturers of digitalwatches used a skimming approach in the 1970s. Once other manufacturers were temptedinto the market and the watches were produced at a lower unit cost, other marketingstrategies and pricing approaches are implemented. Premium pricing, penetration pricing,economy pricing, and price skimming are the four main pricing policies/strategies.However there are other important approaches to pricing.
2.5 Psychological Pricing
This approach is used when the marketer wants the consumer to respond on an emotional,rather than rational basis. For example one dollar shops are an example of psychologicalpricing.
2.6 Product Line Pricing.
Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example car washes. Basic wash could be $2; wash and wax $4 and thewhole package $6.
2.7 Optional Product Pricing.
Companies will attempt to increase the amount customer spend once they start to buy.Optional 'extras' increase the overall price of the product or service. For example airlineswill charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.
2.8 Captive Product Pricing
Where products have complements, companies will charge a premium price where theconsumer is captured. For example a razor manufacturer will charge a low price andrecoup its margin (and more) from the sale of the only design of blades which fit therazor.

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very informative article

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