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Software Marketing – Pricing Your Software Application

November 11th, 2011

Software pricing and software sales

software marketing and pricingYou can sell more of your software if you make it simple for prospects to learn the price. If you hide the price, they won’t be reading the sales presentation on your website. Instead, they’ll be scrolling and clicking, trying to find out how much you charge for your application.

Paco Underhill, in his book “Why We Buy – The Science of Shopping,” points out that shoppers in brick-and-mortar stores dislike obscure price tags. The same distaste for hidden prices carries over to the Internet. I’d guess that Underhill would be urging software developers to make it easy for prospects to find their pricing information.

Software price and differentiation

Many developers try to use their software’s price as a way of differentiating it from their competitors’ programs. According to Jack Trout, the author of “Differentiate or Die,” price can rarely be an effective differentiating idea. In fact, Trout believes that price can be the enemy of differentiation.

As soon as you talk about price, Trout tells us, people assume that you’re not able to state why you’re different from – and superior to – your competitors. So, it’s best to avoid competing on price.

If you should decide to compete on price, then be sure to have an integrated theory on how price and value are merged together to provide something unique. Trout provides a number of examples:

  • Southwest Airlines used this strategy with their low ticket prices plus a system of hubs in smaller municipalities.
  • Wal-Mart succeeds with low prices plus store locations in smaller towns plus vendor contracts that support their lower prices.
  • Dell uses affordable prices along with direct sales to succeed.

Price alone probably is not a good basis on which to compete. But price plus something else – something that makes a low price logical – can be an effective way to differentiate a product or service.

Responding to competitors’ software prices

software marketing, pricing, differentiationIf you have a competitor who is making your life miserable by lowering the price of their software, then there are some strategies that you can use to compensate. Here are three of Trout’s suggestions, translated into the software development industry:

1. Do something unusual. Don’t just lower your price to match a competitor’s price. Instead, create a software bundle, or find a non-price way to change what you’re offering to your customer base.

2. Confuse the marketplace. That’s what MCI did when they launched their “Friends & Families” discount program. MCI made it very difficult for prospects to tell if their pricing would be higher or lower than, say, AT&T’s more traditional long-distance pricing.

3. Change the discussion. Admit that your software costs more to buy initially, but tell your customers that you give away free upgrades for the first three years. Talk about the total cost of ownership (TCO). Find some way to change the argument from initial price to overall cost for the life of the software.

Marketing with lower software prices

Trout believes that price reduction sales are a bad idea. He doesn’t believe that they bring in incremental income in the long run.

software marketing and competitive softwareSergio Zyman, author of “The End of Marketing As We Know It,” believes that discount prices are a sign of marketing laziness. Price-cutting is what marketers do when they run out of creative new marketing ideas. “When a price promotion ends,” Zyman tells us, “the consumers move on to the next guy who’s willing to pay them to buy his product.”

Trout gives us an interesting example of low prices in the sports retailing business. The four biggest sports retailers are all losing money. They’ve been competing on price. And when Wal-Mart and Kmart got to the point where they were selling 35 percent of all sports equipment in the US, the major sports retailers were in a world of trouble.

Trout is not a fan of the “free” trend that we see so much in the software development industry. He believes that it’s very difficult to distribute products or services for free, and still turn a profit at the end of the year.

Can you succeed with a high-price strategy? Many people believe that the highest quality products should cost more. And people are willing to pay for products that will impress their neighbors and coworkers. A high price, Trout believes, becomes a benefit of the underlying product because it impresses the buyers’ friends and colleagues.

software marketing, raising software prices, and lowering themLowering prices is not a particularly good long-term strategy. So says Philip Kotler, author of “Kotler On Marketing – How to Create, Win, and Dominate Markets.” At the time Kotler penned this book, he had sold more than three million marketing textbooks, and done marketing consulting work for AT&T, General Electric, Ford, IBM, and other Fortune 100 companies. The man knows a lot about marketing.

Kotler reports that the marketing professionals who attend his seminars believe that their customers are more sophisticated than before, and more price-sensitive. At the same time, these attendees believe that dropping prices doesn’t work because competitors respond in kind, and everybody loses.

Kotler believes that it’s a mistake to price your product or service based on a mark-up. Your prospects and customers don’t care how many hours it took you to write the program, or how much you paid for the programming tools that you use. Instead, software developers should base their prices by figuring out the value of the product to their customers.

Branding and pricing are tied together, Kotler suggests. Marketing is all about building a brand. If you don’t build a brand and differentiate yourself from your competitors, then you’re selling a commodity. And the only way to differentiate yourself in a commoditized market is by price.

Software pricing and marketing strategy

Determining the price of your software should be part of your marketing strategy. And don’t use a simple definition of price. You need to consider the list price, site license discounts, allowances, coupons, credit terms, affiliate fees, and commissions, as well as any bundled products or services that you may be offering.

Developers often ask if it makes sense to offer a low-priced personal license and a higher-priced business license, for identical software. Some consumers may be offended by the idea. On the other hand, consumers are used to this kind of pricing.

software marketing and pricing strategyFor example, if you go to a concert, you’d expect to pay more for seats that are closer to the stage, even though the seats cost no more to manufacture or install than those seats that are farther away from the stage. And most people would expect to pay more for weekend tickets than for weekday tickets. The concept isn’t bizarre, but it has to be sold to your software prospects.

Kotler tells us to find a way to add value to the more expensive version. You could offer priority support, or coupons, or long-term discounts to the people who buy the business license. The solution is to create a series of attractive offerings at a range of price points.

Software pricing and repeat customers

Developing long-term customers, Kotler believes, can offer a lot of advantages to people who are marketing products such as software. You can cross-sell and upsell to them. It takes less effort to complete transactions with them because they’re familiar with your software, communications, emails, and procedures. They’re more likely to recommend your programs to their friends.

But there is also a pricing consideration. Long-term customers are less price-sensitive because they’ve developed a relationship with your company. They’ll pay a little more for your software because they trust you, and because they’re comfortable buying from you.

Kotler sees pricing as a way to deal with difficult customers. Most companies lose money on some percentage of their worst clients. If you’re getting customers who require too much technical support, for example, find out why they’re buying from you, and do something to change that.

If you want to keep these customers, then educate them, so you’re not spending as much time supporting them. Or raise your prices so it’s worthwhile to deal with them.

Marketing with higher software prices

Advertising genius David Ogilvy has some thoughts on maintaining high prices in a price-sensitive world. In his book “Ogilvy on Advertising,” Ogilvy said to his prospects, “If you are going to choose your agency on the basis of price, you are looking through the wrong end of the telescope.”

software marketing and pricing software applicationsOgilvy urges his prospects to think about the increased sales that he can deliver to them, and not the amount of fees that he charges. This approach can be effective in selling software online, too.

Don’t price your product too low. Ogilvy points out that people judge the value of a product by its price. I agree. I’ve said for years that too many software developers price their applications too low, and it damages their profits.

Harry Beckwith, the author of “The Invisible Touch – The Four Keys to Modern Marketing,” agrees that low prices are not the answer to business success. Beckwith believes that higher-priced goods and services are perceived to be better than lower-priced ones. Price changes perception. Price can actually enhance the experience of using a product or service.

“Higher prices don’t just talk,” Beckwith insists. “They tempt.” My 25+ years of marketing experience in the software industry confirms this belief. In the software industry, most developers will tell you that their Pro version outsells their Standard version.

Beckwith goes on to say that price is often the excuse (but rarely the reason) that you’re losing market share to your competitors. “Look deeper,” he advises.

Most people can afford to pay more money for your software application. Don’t charge them less. Instead, do a better job of convincing prospects that your applications have more value than the software that your competitors offer.

Pricing your software application

There’s no shortage of advice on how to price your software application. But there is no simple formula for arriving at the perfect price-point for your programs. You have to consider all of the factors discussed above, take your best guess, and measure the results. Then, change the price and measure again. My best advice would be – raise your prices. They’re probably a little bit too low.

by Al Harberg, the Software Marketing Glossary guy from DP Directory, Inc.

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  1. Az
    November 12th, 2011 at 03:19 | #1

    “You can sell more of your software if you make it simple for prospects to learn the price.”

    In my case, this is simply not true. I have performed a basic split test where in the new page, I hide the software price.

    The new page performed much better in terms of trial conversion and paid conversion.

    70% increase in trial conversion
    90% increase in paid conversion

    The product price is $240

  2. November 12th, 2011 at 12:24 | #2

    If you read books about face-to-face selling of high-priced products and services, you’ll find a common theme: Never tell prospects how much it costs until you’ve established the value of what you’re selling. In the early days of the Internet, a lot of sellers used this approach for their online sales, too. And the results were disappointing.

    Most sales professionals have found that this approach is not effective on the Internet because today’s buyers want to know price information immediately. If pricing information isn’t on the home page or product page, they’ll click your “buy now” link to find it immediately. And you can only hope that, after finding out how much it costs, they return to your home page or to your product page to learn more about what you’re offering.

    It sounds like your experience is different from the conventional wisdom. There are so many factors – Are you competing in a growing market, a mature market or a declining market? Are you a well-known market leader in your software niche, or do you not rely upon name recognition to boost your sales? Do your direct competitors have prices that are higher than yours, or about the same, or lower?

    Your experience demonstrates that it’s important to test everything. Make changes, measure the results, and keep tuning every facet of your website.

  3. November 15th, 2011 at 06:20 | #3

    Deciding to price your software product at X amount is probably the toughest challenges we face. How I price is I go neither low nor high, stay in the middle and yet consider all costs incurred by me plus a margin. It has worked for me so far.

  4. November 16th, 2011 at 17:39 | #4

    Great post

    Pricing is always tough. There seem to be 2 strategies that perform well.

    Freemium as a marketing investment to but market share, works if you can develop a good viral coefficient and make it addictive, so you get upgrades.

    Or charge somewhere around 75th percentile for your market, to establish yourself as a premium player but not outrageously expensive

  5. November 18th, 2011 at 00:56 | #5

    Your remark on the PRO vs Home sales is true. In terms of income PRO gets me double the income of Home for my program Repligator.

  6. Brian R
    November 18th, 2011 at 04:40 | #6

    All those annoying face images draws my attention away from the article…

  7. November 18th, 2011 at 10:44 | #7

    Don’t forget to watch the pricing of your competition. If you have a professional product don’t try to be the cheapest or the most expensive.
    Most customers have in mind that there is a reason for a product being cheap. So they look for the more “quality” higher priced products. On the other hand they are not willing to overpay (filtering out the most expensive one) – everybody loves a special or bargain.

    Just my 2 cent


  8. November 18th, 2011 at 16:03 | #8

    PRICE is not important – VALUE is. So what is value then? At Starbucks you pay $4 for a cup of java, while McDonald’s down the road offers you coffee for less than $2.

    Keep in mind that the “product” is not just your software, it’s your company. It’s the way a potential customer experiences your website, the trial period, your FAQ, your documentation, your support. The more comfortable the buyer feels with your offer, the more he will value it.

    I’d rather buy a software for $40 at a company that I feel comfortable with instead of $20 for a company that offers its software like the drive thru.

  9. November 19th, 2011 at 00:30 | #9

    With Smart Diary Suite I’ve tried to create something for everyone – there is a free edition and then there are three more (Lite, Home and Medical) to suit various needs for features vs budgets. I also made sure it’s easy to upgrade from one edition to another, so that users can start at any level and get more features when they need to.

    The Medical edition may be considered high-priced (at $69.95 US), but I believe it gives people more than competition can offer both in terms of software functionality and also support and future development. I’d say that Home and Medical are both best sellers, with the Lite edition being the least-bought.

    Still, I don’t know for sure whether my pricing is correct and I would be very interested in trying to learn about pricing techniques some more.

  10. November 19th, 2011 at 00:42 | #10

    I thought Az’s comment about showing the price was interesting. I’ve never done any A/B testing on this, but I know what annoys me. And having to search for a price is very annoying.

    Over the years I’ve been nervous about raising the price of my software, but all price hikes (until the last one) raised not just my income but the number of sales. After the last and likely final hike the number of sales finally declined but income was still up thanks to the higher price. My sweet spot is likely at a somewhat reduced price, but I’m reluctant to change something that is working well. For comparisons see


    After viewing that chart you may come to the conclusion that renting Al’s Brain trumps all. I would not discourage that conclusion šŸ™‚

  11. December 29th, 2011 at 12:33 | #11

    Timely article since we’re about to enter a new market. We’ve become well-versed on the existing competition, and we plan to attack our new market using lower priced software with 80-90% of the capabilities of established players (a strategy I’ve used successfully at other companies before).

    However, we’re also cognizant of consumer impressions such as Hans Fremuth’s “Iā€™d rather buy a software for $40 at a company that I feel comfortable with instead of $20 for a company that offers its software like the drive thru.” To that end much of the work we’ll be doing in the next few months will be outside the core code. Instead, we’ll be improving the look and feel of our web site, documentation and buying processes to match those expected in our new market before we dive in.

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