Blog

I met Ed Maklouf from Siine last week, at Seedcamp. It was a nice experience. Thanks to him, I discovered the e-book “Don’t Just Roll the Dice” about how to price software.

You can download the PDF from the official site, a guide to software pricing.

I wanted to share some lessons I learned from it:

A product is not only about software

Have you ever wondered why some stores still use awful sales software, or why would any school use Blackboard? It’s because product is more than just the software.

When you buy Sage software, you are not just buying software. You are buying reassurance: when the tax laws change, the software will get updated too. You are buying familiarity: if you buy Sage, the odds are that your accountant or bookkeeper will already be able to use it. You’re buying support: if you don’t understand some of the accounting codes or procedures you need, then you can phone somebody for help. Forty thousand people call Sage’s help line per day.

You’re just testing the market for the big players

Microsoft is famed for this. They wait for competitors (and often part- ners) to prove markets with low volume, high price products – whether it’s CRM, testing tools or business intelligence – and then jump in with a low-cost, high-volume model.

Piracy can be a democratizing tool

Many products can differentiate their customers by offering versions. For example, Teambox offers different plans for big and small teams. But not all software is like this. Games, or suites like Office, are harder to version. So what to do when people start pirating?

Photoshop costs $700, even though the product has many cheaper, or even free, competitors. How come? People use pirated versions of Photoshop and then buy when their conscience kicks in, or they get rich. If Adobe dropped the price to $300 then the pirates probably still wouldn’t buy, and they’d lose money from people who’d pay the full $700. They’re best keeping the prices high and having a product that pirates aspire, one day, to own legally.

About free trials

Here’s another example. If you decide to stop using FogBugz within ninety days of your free trial expiring, then Fog Creek will refund you all the money you’ve spent.

These strategies have two effects: first of all, they reduce the psycholog- ical and economic impact of switching to Word or Fogbugz. Secondly, once you have switched, you’ll have invested time and energy into using the new software, and will have incurred a whole load of new switching costs, which will then stop you from switching back.

Adding more pricing options drives users to the middle

Although you may be trying to sell only two plans, it will always help to have a highly-priced version for reference. By the principle of contrast (explained in this great book), the expensive version of your product can set the price reference and make your middle options seem cheaper.

Adding more choices at the edges drives people to the middle of the range. They don’t want to appear stingy, or greedy, so go for the safety of the middle.