Software Pricing – the Rogue Vendor

Last time, I wrote about how rational economics dictate how vendors should set software pricing.

Now, let’s look at how rogue vendors screw up the market for both customers and  vendors when they “dump” software on the market at prices far below what rational economics dictate.

Low prices may seem like a good thing for customers, but irrational actions by rogue software vendors are generally bad news.

Software prices that are too low end up leaving customers with software that has little or no future, simply because the vendor does not receive an ongoing revenue stream to support continued reinvestment. 

Although it might not be immediately obvious, there are plenty of war stories where customers thought they were getting a deal only to find out that their short-term decision came back to bite them even just 2-3 years down the road.  The upgrades, the enhancements, or operating system support they needed just did not materialize, and in many cases, the customer ended up repurchasing the more stable solution that they originally deemed too expensive.

It really is a story of “you get what you pay for”.

It’s much better – for both customers and vendors – to reject rogue pricing and stay with established vendors that have a track record of reinvestment and innovation. 

At PAS, we place a very high value on reinvestment and innovation.  In 2005, over 40% of software license revenues were reinvested into product enhancement – which is good for PAS and the customer.  And our 39% growth in 2005 shows that to be the case.

PAS is not alone in the software markets it serves – there are other companies delivering software for alarm management, advanced control, etc. – other companies that also set software pricing to support reinvestment and innovation.

However, there are also companies in our market space with little regard (or understanding?) of the economics of software pricing.  Their belief that software licenses are “free money” do a disservice to customer value, vendor needs and their own intelligence.

How is a software vendor to react?  There are three important steps to take, but  no sure-fire conclusion.  These are:

1)     educate the market – customers need to know that unusually low software prices generally spell trouble for the future – driving down innovation and long-term value (especially when the rogue vendor finally figures out software economics and decides to abruptly abandon the market)

2)     keep on investing – although it’s tough, the good guys need to keep investing in what made them successful in the first place – the innovations that rogue copycats are generally incapable of producing

3)     re-package and re-price – of the four P’s of marketing, the good guys need to work these as best they can, allowing them to deliver a low-end product or part of a product suite at or close to rogue pricing and recover the value through higher-level, higher-value product add-ons that the copycat rogue can’t really deliver

Doing the right thing always pays – for both vendors and customers.

Long live rational software pricing!   And for the rogue vendors – we all know who you are and we’ll be watching you!