Software Pricing = Rational Economics

Ever stop to think about how companies in our markets set software pricing?

Rational economics would dictate that companies set software prices based on fact.  Software prices need to be low enough to meet the customer’s demand for a certain rate of return, and high enough to support continued investment in the product by the vendor. 

Software pricing is therefore normally set at rational levels that satisfy both parties.  And, in most markets (especially relatively small ones like ours), the benchmark price for a particular software application is pretty well known to both customers and vendors. 

And market forces help keep it that way – at least as long as all the players are rational….

For example, if any one vendor sets their price too high, customers just stop buying and look to other sources. 

And, even if a vendor can support high pricing because of a first-to-market status or other advantage, other vendors will eventually see the opportunity and introduce “copycat” software to bring the leader’s prices back down to more rational levels.

Even the copycat vendor can’t bring prices too low, or they end up not being able to raise enough for product reinvestment and support.  In these cases, market forces eventually drive the too-low-priced copycat out of the market.  After all, nobody wants to buy software with no future.

So in a rational market, there ends up being a natural balance to software pricing.  Which is good for both customers and vendors alike.

Rational pricing is good for customers because it gives them software with a future.  It is good for market leaders because they can continue their reinvestments into new product innovations, which help them retain market leadership.  And it even helps the copycats as they work to proliferate base functionalities desired by customers who see less value in the higher-value software suites from the leader. 

So we have good news all around.

But the party ends when any one software vendor decides to price software at levels too far below market values. 

Just remember that you always get what you pay for – my next blog will dig into the problem of rogue vendors who think that software licenses are “free money” because of their irrational belief that the incremental cost of software is just the CD (or the download website).

Stay tuned…