Pricing is a key component of your marketing mix. After all the resources your team has exhausted researching and developing an excellent piece of software, you want to be sure you have a winning strategy in place to maximize your software’s profitability.
Two key elements to consider when developing your pricing strategy are price modeling and distribution method.
Price Modeling: Cost vs. Value
In the past, software companies used the cost-based pricing model (AKA cost plus pricing). Cost based modeling takes the cost of producing the software and adds a premium to make a profit; the premium is typically expressed as a percentage of the cost. While cost-based modeling provides okay revenues, it may leave the full earning potential of your software untapped. Many software companies are instead turning to value-based modeling. Value-based modeling focuses on the price customers are willing to pay compared to the competitive benefits the software offers. By changing to value-based modeling, software companies may ensure that they aren’t leaving money on the table!
Distribution Method: From The Box to The Cloud
Packaged software used to be distributed to customers as perpetual licenses sold in a box via retailers. Continued revenue depended on the continuous publication of new releases. This generally resulted in high up-front costs for software customers and uneven revenues for software providers. Instead, tech companies have been moving to digital or Cloud distribution methods for their software. The Cloud stores software in massive shared data centers all around the world for easy online access. This cuts out middleman distribution costs, reduces the overall production cost, and strengthens the case for a value-based pricing model. Digital distribution means customers benefit from low-to-no up-front licensing or renewal fees and vendors see steadier cash flow.
Value-based modeling combined with digital distribution is the best option for your company to maximize continual revenue streams from your software. This provides the best buying option for your customers while generating regular and reliable income streams for your software company.
Read Software Pricing Strategy Part II and see how the culture of software sales is shifting its focus to the end-user experience.
This blog series is an update to a previous Silicon Valley Research Group blog publication by Wes Fu.
Heather Carpenter is Silicon Valley Research Group's Marketing Manager.
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