Posted by Wes Fu ● Sun, Jun 09, 2013 @ 02:31 PM

Understanding Software Pricing Strategy

Creating a technology pricing strategy is vitally important to any tech business.  This won’t come as an easy task and there are many things a company must consider when looking to build a winning pricing strategy. One thing to realize is that customer values and perceptions are constantly changing, and their spending patterns change as well.  Thus, a company must change its pricing strategy to accommodate their changing customers. In this blog we will discuss the trend from licenses to subscriptions in software pricing, cost versus value based technology pricing strategies, and some pricing strategy research techniques that could guide your company to building a winning pricing strategy.

The trend in software pricing strategy has moved from selling software licenses, often in a box, to subscription based, and “box-less” model. Traditional software pricing strategies were focused on selling software licenses, and then charging with each new release. This generally resulted in high up-front costs for software customers and uneven revenues for software providers. Newer software pricing strategy models are subscription based, typically monthly or annually.  This strategy focuses on customizing different options to cater to different segments, typically based on differences in price sensitivity or interest in “Killer Features.” Subscription based software pricing strategies, skips the focus on new releases, makes the focus on continuous improvement and provides more regular and reliable income streams.  costbasedpricing

Another traditional software pricing strategy was the use cost based modeling.  Cost based modeling takes the cost of producing the software and adds a premium to make a profit, usually expressed as a percentage of the cost. The movement now is heading toward a more value based model. Value based modeling focuses on the price customers are willing to pay compared to the competitive benefits the software offers. The image to the right depicts the differences between cost and value based modeling. Value based pricing is helping software companies ensure that they don’t “leave any money on the table.”

The following are a few innovative software pricing strategies we have helped companies optimize for their own market:

  • SAAS CLOUD COMPUTING
    • Software as a service accessed over the internet which is centrally hosted on the cloud and paid by per use or per user subscription.
  • COMMERCIAL OPEN SOURCE
    • Software that has no license fee’s but requires fees for usage and support.
  • TERM LICENSING

    • Usage or redistribution of the software for a fixed period of time
The combination of subscription and value based pricing will help your company maximize a continual revenue stream from your software (or other products).  The customer doesn’t have to worry about upgrade costs, and will help build a stronger relationship between vendor and customer.RealSoftwareCostWe at Silicon Valley Research Group have a variety of custom market research techniques that can help your company with its software (or other products) pricing strategy.  One key technique is discrete choice and technology conjoint modeling or analysis to determine how people value different features that make up an individual product or service. This technique can also identify which segments are more or less price sensitive, or interested in certain “killer features.” We also recommend SVRG’s cloud computing Customer Anthropology Labs, which can help your company gain detailed qualitative insights to ensure that the value message is properly conveyed and any customer objections are properly mapped.Due to the constantly changing values and perceptions in today’s marketplace, it is important that technology company accommodates their customer’s and build a winning technology pricing strategy.  Now that you understood the subscription modeling trend, cost versus value based software pricing strategies, and some pricing strategy research guidance, you can start making the strategic decisions to create a winning software pricing strategy.Please comment below or contact Silicon Valley Research Group for help with custom technology pricing strategies.

Topics: Pricing Strategy

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