How to price?

Basics of Pricing
PRICING is like finding a sweet spot where both the seller and the buyer feel like they're
getting a fair deal. It's a delicate balance between what something costs to make or provide
and what people are willing to pay for it, considering various factors like competition and
value.
The Sweet Spot
Price elasticity of demand and supply refers to how sensitive the quantity demanded or
supplied is to changes in price. If demand or supply is elastic, a small change in price will
lead to a relatively large change in quantity demanded or supplied. If it is inelastic, changes in
price have a smaller impact on quantity.
How is the price determined?
Determinants of Pricing

Tangible vs. Intangible

Physical products are tangible items that customers can touch, feel, and see. Software
products, on the other hand, are intangible and exist in the digital realm. This impacts the
perceived value and pricing approach.

Production and Distribution Costs

Physical products involve manufacturing, shipping, and inventory costs. Software products
typically have lower production and distribution costs, making it easier to scale without
incurring significant expenses per unit sold.
Updates and Maintenance
Software products require ongoing updates, bug fixes, and maintenance, which can be
included in subscription fees. Physical products may have less frequent updates and usually
require separate purchases for new versions.

Piracy and Copy Protection

Software products may require measures to combat piracy and unauthorized copying, which
can influence pricing decisions. Physical products are less susceptible to digital piracy.
Customer Support
Software products often require ongoing customer support, which is factored into the pricing.
Physical products may have customer support requirements, but they can differ in nature and
cost.

Value Proposition
The value proposition for software products may revolve around features, updates, support,
and convenience. Physical products may emphasize qualities like durability, design, and
physical usability.
Cost calculation of product development
Personnel Costs
Salaries and Wages: This includes the compensation for developers, designers, project
managers, quality assurance testers, and other team members.
Contractor or Freelancer Fees
If you hire contractors or freelancers for specific tasks or expertise, their fees are part of the
personnel costs.
Software Tools and Licenses
Development Tools: The cost of software development tools, integrated development
environments (IDEs), and other software required for coding, testing, and debugging.
Version Control Systems
Costs associated with using version control systems like Git.
Project Management Tools
Expenses for project management and collaboration tools such as JIRA, Trello, or Slack.
Hardware and Infrastructure
Hardware Costs: This includes purchasing or leasing servers, workstations, and other
hardware necessary for development and testing.
Cloud Services Fees for cloud computing and hosting services (e.g., AWS, Azure, Google
Cloud) if you use them for development and hosting.
Design and User Interface Costs
Design-related expenses, such as graphic design software licenses, design tools, and costs
for user interface (UI) and user experience (UX) design services.
Costs associated with securing intellectual property rights for your software, such as patents
or trademarks.
Software Licensing and Intellectual Property
Licensing fees for third-party software components, libraries, or APIs integrated into your
software.
Security
Costs associated with implementing security measures, including encryption, vulnerability
assessments, and cybersecurity tools.
Project Management
Costs associated with project management, such as project management software, project
managers' salaries, and administrative expenses.
Training and Documentation
Expenses for creating user manuals, training materials, and providing training to end-users or
support staff.
Travel and Meetings
Costs for travel, meetings, and collaboration if team members are geographically dispersed.
Pricing - Variables
Product Pricing - Variables

Frequency. One of the first major decisions you have to make is on frequency.
Product Pricing - Variables

Secondary Revenue Sources : Charging for the software is obvious, but there
are other ways to make money from a software company.
Think: training, support and upgrades.
Product Pricing - Variables

Competition. : This is an obvious place to look for pricing data. What are your competitors
charging? At minimum, you should know, because your customers do. It might be easy to say
to yourself, “Let’s price ourselves cheaper than everyone else,” but I would argue against that
strategy. At that point, you might as well be free. Price is important, but it’s not the only factor
in a purchasing decision. Oftentimes when people are looking at price quotes from vendors
they throw out the cheapest and the most expensive … it’s like scoring in figure skating.
Product Pricing - Variables

Internal Numbers: You need to have a strong handle on internal cost numbers and revenue
projections. These numbers shouldn’t dictate how you price your software product, but they
certainly have an impact. For example, What happens if you charge $120 more per year per
customer? Does that have a significant impact? How many fewer customers do you need to
“break even” if you charge $10 more / month?
Product Pricing - Variables

The Market. You need to have a general sense of the market and what it will bear. You need
to understand how software is purchased in your market, by whom, and when.
So What are the pricing models?
Pricing Models

Perpetual License
Customers pay a one-time fee for a lifetime license.
Pricing Models

Subscription
Customers pay a recurring fee (monthly, annually) for access to your software.
Pricing Models

Freemium
Offer a basic version of your software for free with premium features behind a paywall.
Pricing Models

Tiered Pricing
Offer multiple pricing tiers with varying features and price points.
Pricing Models

Usage-Based Pricing:
Charge customers based on their usage (e.g., the number of users, transactions, or data
volume).
Pricing Models

Consumption-Based Pricing:
Charging based on storage is a consumption-based pricing model.
Break Even Point

Neither Profit Nor Loss