Pricing, has always been a key area in Software products and a major challenge as well. There is no Bill of Material (BOM) to arrive at the costs nor is there any indication of the extent of support that would be required for the pre-sales and more importantly the post sales periods.

Joel has in his article Camels and Rubber Duckies has a very conversational piece on pricing software products and it made very fine reading. he had very neatly inserted economic concepts like consumer surplus without any continuity jerk and I loved that. However, there is an eternal question of what should I take into account while pricing my products and so we shall talk about it in this post.

one is always left wondering if one is leaving money on the table or so overpricing the product at the risk of finding few or no customers. Given that the primary premise of a Product business is volume, this dilemma becomes even more acute.

The traditional methods of pricing that work elsewhere become really ineffective when they are applied to software products. for example, given that the cost of media, replication and packaging is pretty low, cost plus pricing will not be to the advantage because any price will appear usurios to the prospects. Given that the cost of development cannot be accurately captured unless developed using an external resource on assignment basis, that element is either exaggerated or underrated. And that cost is not an one time cost given the constant need to maintain, fix and upgrade. So clearly there is no end date for a product.

And I am not talking about the support costs here but only the back-end job of fixing bugs, testing them etc. And those who sell Products must surely factor in the support cost in the price of the product unless of course if they are charging a maintenance amount that is regular. Even a stable product might create support issues if it is not easy to use and hence mere focus on robustness of code will not be sufficient.

With more parameters like maintenance and support in the radar, pricing becomes more complicated. With the ever increasing costs of human resources and the constant threat of the biggies poaching on good talent, one must make some money to give incentives for all kinds of people like programming, support, sales, design etc. who is going to pay for that? The customers, of course!!

So far, I have talked only about some of the actual costs. If you have borrowed money to startup, then there is the interest cost and if others have funded you, there would be an expectation of some return in the form of dividends. You might not have paid yourself much to conserve cash and to motivate you as well keep you alive, you must pay something to yourself. You want to promote your product and that costs money. You may want to travel and participate in fairs and all that has to be funded now. You want to create better facilities and infrastructure for your people so that they are more productive.

My intention of bringing all this into perspective is not to load everything on a few customers and scare them away. On the contrary, I do not want you to assume that anything you get more than the cost of the media and packaging cost is profit.

You must strike a delicate balance between the unit revenues and the volumes so that your operations are profitable to address the current as well as future initiatives.

Here we go!