Submitted 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
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Abstract
This paper gives a basic outline of pricing strategies of software products adopted by two
software majors in India, which will be a starting point for further study on pricing
strategies. 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 an
empirical study.
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1. Introduction

Software pricing strategy plays a significant role in augmenting software market

sales. It can be interpreted as an important tool in the marketing toolbox which a
company needs to consider before launching a product in the market. The managerial
group in the software industry has conventionally improved their pricing strategies based
on cost related criteria. Cost-based pricing strategies concentrate on the product value to
the 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 the
value 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 while
meeting profits on investment goals. This paper presents a comprehensive view about the
conventional cost-based approaches to software pricing; these ideas to software pricing
are short-term and place the seller’s interests over the interests of the buyer. On the other

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hand, pricing approaches are based on customers perceptions of value are planned and
long-term in nature. This is due to the fact of capturing unique value from each market
segment 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 strategic
pricing helps in making quality decision making about the product during the product
development cycle. Moreover, it also provides good understanding about how customers
value price alternatives and come up to prices that they are willing to pay. As a starting
point 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 is
used where a substantial competitive advantage exists. Such high prices are charge for
luxuries 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 market
share. 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 a
minimum. 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, the
advantage is not sustainable. The high price tends to attract new competitors into the

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market, and the price inevitably falls due to increased supply. Manufacturers of digital
watches used a skimming approach in the 1970s. Once other manufacturers were tempted
into the market and the watches were produced at a lower unit cost, other marketing
strategies 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 psychological
pricing.

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 the
whole 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 airlines
will 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 the
consumer is captured. For example a razor manufacturer will charge a low price and
recoup its margin (and more) from the sale of the only design of blades which fit the
razor.

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2.9 Product Bundle Pricing

Here sellers combine several products in the same package. This also serves to move old
stock. Videos and CDs are often sold using the bundle approach.

2.10 Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of
promotional pricing including approaches such as BOGOF (Buy One Get One Free).

2.11 Geographical Pricing

Geographical pricing is evident where there are variations in price in different parts of the
world. For example rarity value, or where shipping costs increase price.

2.12 Value Pricing

This approach is used where external factors such as recession or increased competition
force companies to provide 'value' products and services to retain sales e.g. value meals at
McDonalds.

2.13 Predatory Pricing

Predatory pricing (also known as destroyer pricing) is the practice of a firm selling a
product at very low price with the intent of driving competitors out of the market, or
create a barrier to entry into the market for potential new competitors. If the other firms
cannot sustain equal or lower prices without losing money, they go out of business. The
predatory pricer then has fewer competitors or even a monopoly, allowing it to raise
prices above what the market would otherwise bear. In many countries, including the
United States, predatory pricing is considered anti-competitive and is illegal under
antitrust laws. However, it is usually difficult to prove that a drop in prices is due to
predatory pricing rather than normal competition, and predatory pricing claims are
difficult to prove due to high legal hurdles designed to protect legitimate price
competition.

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2.14 Limit Pricing

A Limit Price is the price set by a monopolist to discourage economic entry into a
market, and is illegal in many countries. The limit price is the price that the entrant would
face upon entering as long as the incumbent firm did not decrease output. The limit price
is often lower than the average cost of production or just low enough to make entering
not profitable.

2.15 Loss Leader

In marketing, a loss leader (also called a key value item in the United Kingdom) is a type
of pricing strategy where an item is sold below cost in an effort to stimulate other,
profitable sales. It is a kind of sales promotion.
3. Cost Based Software Pricing
Cost-based software pricing is one of the most popular methods which rely on the
information provided by the cost-accounting system. This authentic data is generated to
produce operating results, budgets, and financial statements. Marketing and product
managers are trained to price the software to yield a desired return on fully allocated
costs. There is no product approval in a business development plan for a novel market
without considering an lucrative return on investment (ROI).This profitably calculations
ignores the voice of the customer and serves as a layout plan for average market results.
Cost-based pricing strategies can tap the power of the market sellers to force a higher
price on to the seller.

3.1 Cost Based concept of Value

The conventional software pricing model addresses customer value which is often
calculated as profit. Profit is figured out by deducting the software's development cost
from its price (i.e., the total value to the customer). In totality, the value to the customer is

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defined in terms of particular needs fulfillment, good will, ease of use, opportunity costs,
the business value of information, or other unmeasured factors.

3.2 Earner Value Concept

Earned value is a related cost-based concept that is used for trailing software’s adherence
to the original project budget. Earned value pays attention on explaining the cost
variances between the amounts allocated for the work and the equivalent dollar volume
of work completed during specified time duration. The cost variances are noticeable to
specific project tasks, which can then be evaluated for corrective action. These cost-based
ideas to measure value form the basis of the main software engineering economics
models.

3.3 Issues of Cost based software pricing

Pricing disputes is the most quarrelsome issues that arise between software vendors and
their customers. Pricing resistance originates from high software prices and perceptions
that the vendor puts its own interest ahead of those of the customers. A lack of trust can
result from oppressive, cost-based pricing. As a result of the relatively big investment in
software research and development when compared to other product costs, software
vendors have high fixed cost (i.e., software development) and relatively low variable
costs (i.e., excluding service and support). The situation outcomes make software product
managers to put heavy emphasis on the aims of cost recovery and rapid return on
investment through the pricing mechanism. This pressure leads to pricing strategies that
are not clearly customer-valued oriented.

3.4 Flat Price

Users pay a fixed price for limitless usage of software product. This idea enables
customers to more easily know in advance for what they will pay for the software usage.
The fixed price is usually restricted to a specific user or machine. Many software
offerings to the consumer are priced in this manner. Some level of online support is

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typically built for a limited time frame. The main disadvantage to this method is the lack
of flexibility in customizing a price for individual customer based on customers required
values. Some customers will have to pay more than they would like and may be intended
to seek better deals. Others will enjoy a subsidy since they would be willing to pay more
for the higher value they perceive. A fixed-price strategy can be segmented to clasp
discounts for large purchasers, government, and members of preferred buying
organizations

2.6 Tiered Pricing

Tiered-pricing tries to package software benefits according to user necessities and

their willingness to pay. This idea to pricing is an effort to link software product costs to
detected customer value. IBM is one among the number one software marketer to make
usage of tiered-pricing idea that is based on the class of processors for its mainframe
computers

2.7 User based Pricing

This is another cost-based pricing method that has the tendency to benefit the
vendor more than the user by maximizing license fee revenues. The charge is based on
the user’s count that utilizes a collection of software features over a given time frame. It
tries to assign costs to a specific number of users or workstations. It is a simple model to

work as compared with tiered-pricing based ideas.

3.8 Value Based Pricing

Software vendors often deal pricing from the requirements to cover costs and
attain profit objectives-often to the loss of their customer relationships. The circular logic
of the cost-based idea where costs sets price and price impacts sales volume throws into
confusion the pricing process. The answer to value-based pricing favorable outcome is
the recognition that the price the customer is willing to pay depends on the customer's

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value requirements, not the vendor's. Buyers make decision about benefits and prices and
select those products that maximize their perceived value. The objective of value-based
pricing is to provide more advantageous pricing by gaining control over value. That price
should, in turn, decide the level of product development cost that the customer is willing
to occur. Infosys Technologies has developed a new method of pricing software
maintenance projects to make its revenues more effort-based and less manpower
dependent. Starting from year 2008, the company will start offering clients 'ticket-based
pricing' as opposed to fixed price and time and material-based pricing for software
maintenance projects. The move is aimed at increasing revenues without a proportional
increase in the number of employees.

Under the traditional time and material-based pricing, customers are billed based
on the number of man-hours spent on a project, while under the fixed price, as the name
suggests, the customer pays an agreed price that doesn't vary with the manpower
deployed on the project. Under the new 'ticket-based pricing', a customer's pay will be
based on certain parameters such as whether the client request or 'ticket' that is raised is
for a small enhancement in the software application, a big enhancement or a bug-fix.

A software application becomes more stable with time. But if a client has opted
for a fixed price model, then even after the application becomes more stable and the
number of requests decreases, the same price has to be paid. Ticket-based pricing will
give them the flexibility to change that and reduce the total cost of ownership.
Application development and maintenance (ADM) revenue accounted for 43.4% of
Infosys' total revenues, with maintenance being approximately half of that, in the just
ended June 2007 quarter. Infosys and other technology majors have been trying to
decrease the dependence of revenue growth on manpower addition. Many of them have
developed new services such as platform-based BPO and software-as-a-service, in
addition to products, to do this. But this is for the first time such an attempt has been
made to bring a transaction-based pricing model to traditional ADM projects, which
account for a bulk of the revenue for Indian IT service providers. For infrastructure
management services as well, Infosys has come up with device-based pricing or pricing
that is based on the type and number of servers, PCs and other devices.

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Wipro offers two core pricing models for implementation:

Pricing Model 1 — capacity-based

This model is based on the minimum capacity required by the client and additional costs
to cover the additional capacity required to fulfill the occasional peaks in demand.

Pricing Model 2 — element-based/object-based

Wipro has also established an element-based or component-based pricing mechanism to

deliver services from the factory. For example, if the factory has been set up to deliver
SAP reports, interfaces, customizations, enhancements, and forms, Wipro can provide the
price for delivering each of the components. Wipro also offers outcome-based pricing
and sees that a clear direction is to move to a business-linked pricing model. Some
examples are fixed plus outcome-based.

4. Conclusion

As it can be observed the pricing based on long term value of customer is likely to
provide better relationship with customer rather than cost based approaches and other
approaches that are borrowed from fast moving consumer goods.