Software pricing and software sales
You 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
If 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.
Sergio 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.
Lowering 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.
For 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.”
Ogilvy 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.