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Patrick McKenzie
Bingo Card Creator

Price vs. Value of Software

I was having an argument with a fellow mISVer about the value  vs Price of Software.

Question: If a customer comes to you and says: "I will buy your software for X or i will go to a competitor" and you know for a fact that this customer is dead serious what is the minimum you will sell the software for? What percentage of the total sale price will you accept

My Contention: I will accept any value of the sale price because software is not like a tangible good, there are unlimited copies and 1% is better than nothing.

My Friend: He will never go below 75% of the sale price because he feels that customers have "perceived value" and if they pay a low price, they will have a low "perceived value" of your program and this will be spread through word-of-mouth. He gives the example of Tiffany & Co (International Jewelers) who will destroy their product rather than to sell it at a discount and ruin it's "perceived value".

What do you guys think?
Brian "Baby" Williams
Friday, January 11, 2008
 
 
Four points:

1. You have just destroyed your price negotiating position, with regards to anybody who can link this thread to a possible purchase of your software. 

2. Even for potential customers who might not be reading this thread - does it not occur to you that they might be offering an initial low ball offer just to test the waters??? There is a simple rule in any negotiations: Never accept the first offer.

3. Also FWIW, no matter how cheap you sell your software, and no matter what caveats, people who paid more than $0 (or in some cases even $0) will feel entitled to bug you about perceived or actual deficiencies in the software.  So it's not cost free to sell software.

4. And, furthermore, if you're spending time negotiating individual prices for your software, each is even less cost free!
Sunil Tanna
Friday, January 11, 2008
 
 
P.S.
This thread is intended as a trap, right?

Are you going to lecture us on how the price of all software ought to tend towards $0 because the price of duplication is basically $0. And the only reason why it's not must be because vendors are imposing an artificial scarcity?
Sunil Tanna
Friday, January 11, 2008
 
 
This situation is prevented by another rule I have:

Don't work with jackasses.

I've had people come to me and make *demands* of my time, effort, and intellect.  At that point, I politely end the conversation.  Haven't regretted that yet.
KC Send private email
Friday, January 11, 2008
 
 
I think another factor is how much your software normally sells for.  If you software sells for $24.95, don't ever give anyone a special price if it requires negotiation.  If you software costs $75,000 then it might be worth your time to negotiate.  Though, in the $75k case you do run a larger risk of destroying the perceived value.
Joshua Volz Send private email
Friday, January 11, 2008
 
 
If you're selling $75K software packages, and it's not bespoke,  you should have a pretty good idea of who your competitors are and how much they charge.  Secondly on a $75K system, you probably have a bunch of costs other than merely duplicating the software: probably a sales person's time, possibly an installation engineer, definitely some support and/or training, possibly even responding to a RFI and RFP, etc.
Sunil Tanna
Friday, January 11, 2008
 
 
(I'm a regular here, but this requires an anonymous response...)

> You have just destroyed your price negotiating position, with regards to anybody who can link this thread to a possible purchase of your software.

And that's why.

I have given out 1/2 price discounts to people without negotiation. If someone emails and tells me, "I live in country X and can't afford $Y. Will you take $Z?" Then as long as I don't suspect that there's some kind of social engineering going on, I take it. I've also had people email me and ask for a reduced price because of some kind of financial disaster in their life. I'm not out to get full price all the time, and this happens so rarely that it's not a problem. I just ask that they don't tell people about the price details and I've never had a problem with it.

At the end of the day, I'm out to not just make money, but I'm also out to have people use and enjoy my software.

Just my situation though. Others may be different.
Not Tellin' For This...
Friday, January 11, 2008
 
 
If you don't give a discount, maybe the company will reconsider the value of having price negotiators. Then maybe they won't bug you for a discount when you bring out the next version. It probably won't work, but you can live in hope.
PeterR
Friday, January 11, 2008
 
 
Yes it costs $0 to reproduce a license and send to them by email.. ok maybe 5min of time if your system is not automated.

However, its the intital weeks, months or years you have put in to building your software or product.  If you are in a position where you have enough buyers where kicking one to the curb is not going to hurt sales, then I'd say tell him to go and get it from your competitor.  Because that same person that got his way negotiating with you is going to milk you for extra time and effort.

One possible solution is to offer say a FREE 3month or 6month or a 1 year license. which ofcourse expires.  That way if he uses your software if ur B2B and integerates it into their system.. they are not going to swap it out for the competitors product just so they can save a bit of money.

I think dropping your price in a negotiation of the software just really drops the perceived value of the product.  Like other's said.. unless your software is in the tens of tousands, negotitaion should be out of the question..

Anyone that questions my $35.00 :)  product pricing, I just kindly throw a free license at them..  sometimes with or without expiration dates embeded..  U'd be supprised at how many people I've actually tracked that came back and bought the software full license :)..  Guilt is a wonderful thing :)

My $0.0000032 contribution to the post :)
Markito
Friday, January 11, 2008
 
 
Well, if you're going to accept a negotiated price, then you may as well do that for tangible goods as well as long as you set a floor. After all, once you cover the Cost of Goods Sold and shipping costs, you're in the same boat as the software situation.

And honestly, I can only think of two reasons not to do it: (1) price really does send a signal and (2) the profit may not be worth the time. I give customers unrequested discounts because they are good: pay promptly and purchase repeatedly. I've also sold product at discount because I knew it was unlikely I'd get the sale otherwise.
As long as you are making sufficient profit, it can make a lot of sense to segment your price by market.
farmboy Send private email
Friday, January 11, 2008
 
 
"He gives the example of Tiffany & Co (International Jewelers) who will destroy their product rather than to sell it at a discount and ruin it's "perceived value"."

Tiffany's (I work right around the corner from one) has inexpensive jewelry right next to their most expensive pieces.

"Buy this gold ring for $1,000 or this one for $125."

You, however, don't have multiple price points* and perhaps you should.

Another point - have you tested your prices? Prices are weird, a $100 difference might not change sales, but a $10 difference may. They're one of the primary things you should be testing.

* Joel discusses why you should http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html
Allen David
Friday, January 11, 2008
 
 
Many great points in this thread.

Another thing I've discovered is that prospects who will beat you down for the lowest price are typically the worst clients.  They continually complain about the product, the service, the warranty, the ... the ...

And when it's time to renew their support agreement they complain about that and bring up every little tiny itsy bitsy thing that has ever gone wrong with their installation in an effort to drive down their support costs.

For clients like this, I've said "perhaps we are not the best fit for you."
Karl Perry Send private email
Friday, January 11, 2008
 
 
Developing, marketing, selling, supporting and improving software are ongoing and recurring costs.  It is far from "free" for you to sell a license of your software.  "Hidden" costs like these have been known to tank businesses in the past, learn from their mistakes.

If you study sales techniques, nearly everyone says "don't discount".  They say that if you need to close a sale, instead of dropping price, add value.

The idea is that you're job as a salesperson is to show that the product is worth the money you ask for it.  Also, if you can point out to the customer that you offer something your competitors don't offer (or you offer more, better, etc) then no matter how much money they can save, they can't get x from anywhere else, only from you.

When that happens, and it's something your customer really needs, then you can name your price (in theory ;-) ).
CRM Send private email
Friday, January 11, 2008
 
 
I once tried to haggle a fast food place on chicken sandwiches.
my name is here
Saturday, January 12, 2008
 
 
This all really depends on the circumstances and especially the price range of the software, as has been stated.

We don't have advertised discounts, but when someone writes in and asks for one, we can do a student or teacher discount for lots of people, and also we'll do a competitive upgrade if you have a competitor's program, you pay the upgrade price rather than the full price. So far this has made people happy. If someone is buying 20 copies I'll also negotiate that one if they want, but I won't fly out to meet them. I have never had anyone say what the OP's customer said, the ultimatum thing. I probably wouldn't like that approach at all.
Scott
Saturday, January 12, 2008
 
 
Without breaking a confidence, a business I once worked trained front line folks that they could always offer one particular perk to the customer.  My colleagues affectionately called it the "Day That Ends In Y Coupon" -- today is a day that ends in Y, here, have a coupon.  I mentally thought of it as "Thanks For Asking" -- our bonus for the discerning customers who thought to ask about these things.  (These include both a lot of inveterate penny pinchers who wil haggle over the $1 parking fee for their $40,000 car *and* your truest and most vocal fans.)

It was something that didn't cost the company much but which did have genuine value to most of the people who were fishing for special treatment and, more importantly, just offering it was special treatment.  Some folks wanted to be special -- to be Getting The Deal! -- more than they wanted any particular amount of money.

Take something I could do with Bingo Card Creator.  Almost all of my customers are educators so that assumption is built into my pricing.  If someone sent me an email saying "Listen, we're just a parish school and we don't have much money, can you give us a discount?", I could say something like "Thanks for asking.  While I'm afraid we can't offer a discount, if you buy a license I will give you the CD for free."  or "Thanks for asking.  While we don't have a formal discount for parish schools, I'd be happy to cut 10% off your bill."  (These are theoretical, as I've only ever had one request for a reduced-price license, and ended up giving them a freebie.)
Patrick McKenzie (Bingo Card Creator) Send private email
Saturday, January 12, 2008
 
 
Incidentally, as an overgeneralization: Engineers get trained to say "No".  Salespeople get trained to say "Yes".  Don't lead with your engineering brain when not appropriate.
Patrick McKenzie (Bingo Card Creator) Send private email
Saturday, January 12, 2008
 
 
We sell high ticket software so Sunil is right about knowing what the competition charges and exactly what they do.

Simply put, we don't do discounts. We go down the negotation route but use it as a signal of the customer's profile. We have found the customers who negotiate price hard, or use it as a stick to beat us generally don't pay their subscriptions on time and use up more support than those that don't.

So, using the OPs original bait "when a customer comes to you and says: "I will buy your software for X or i will go to a competitor" - we say "Off you go"
Cyclops Send private email
Saturday, January 12, 2008
 
 
This happened to me several times. I simply said, "if you don't require our superior product and superior support, then you will probably be happy with our competitors' products."

I never heard from those people again, but I'm happy because I don't need customers like that, they're always trouble (as everyone here agrees).

A sale is not always a sale, especially with low-ticket items. Sometimes it's a liability. If they did go to my competitors, maybe they're slowing them down with over-the-top support requests. So I win. :)
Schadenfreude
Saturday, January 12, 2008
 
 
Brian,

If you're willing to accept 1% of the list price then you're putting yourself in a very weak negotiating position. Your potential customer might be threatening to go to a competitor, but is that really true?

Is the only thing distinguishing you from your competitor really price? Don't you feel that your product is better, or at least different to your competitor's? Wouldn't buying from your competitor be the second best option for your customer? You're in a much stronger negotiating position than you think. Compete on features / quality / usability / whatever it is that you're good at, not price.

The only place that software prices will be driven to $0 is in an economics text book. Software is not a commodity. In fact, you could argue (as Ted Leavitt has, for instance) that *nothing* is a commodity. Even if the raw good that you sell is identical to somebody else's, you can still compete on service, reliability and so on. Coffee beans are a commodity, so de-commodify with 'fairtrade'. Wine is a commodity, so do-commodify with branding (see Stormhoek). Selling gasoline is a commodity, so de-commodify with service. Etc., etc.

Also, you're only looking at one side of the equation: what the software is worth to you. You need to look at the other side: what it is worth to him. The price you sell at will be somewhere between those two points.

Even if it does eventually come down to price then there are other things you can do. If he's only willing to spend a certain amount then sell him less software (eg fewer seats), or throw in free support or free upgrades.
Neil D Send private email
Saturday, January 12, 2008
 
 
There is another factor I think you are missing. If you wrote the software yourself then surely you have some sense of the time and effort involved. If someone is only willing to pay half the advertised price then I would tell them to look elsewhere, as I value my work more highly than the money they are offering.

Why should I value my hard work so cheaply? Why should I cheapen myself? I am a professional and if you want the benefit of my work then you should pay the going rate. Which I would add is actually a perfectly fair and reasonable price. To pay me half the value of my work is to insult me. Be gone you miser.
Programmer
Saturday, January 12, 2008
 
 
This must be a cultural thing, because in the U.S. anyway nobody negotiates off-the-shelf products. Cars, houses maybe but not things you buy from stores (online or off). I guess it's just mathematics -- you make more setting the price at the point you make the most revenue for your inventory or capacity (which means losing sales to people who can't afford it), rather than trying to make the most unit sales at whatever price it takes.
Bill
Saturday, January 12, 2008
 
 
It entirely depends on the customer. If they're an arse then I'd send them to my competitor. If they're worthwhile then I would give a discount. As to the lowest I'd go to: FREE. It's not going to hurt me if someone asks me for a free licence. If they then go and blog about my product then I've gained sales and lost nothing.

When I first started selling my second product I contacted a user who loved the free version and offered him a free licence of the new version. Now this person was an almost guaranteed sale, yet I gave him his licence free. Why? Well I know of at least 4 sales of my software that have been due to a direct recommendation from him.

Essentially use the following rule of thumb:

Are they going to help sell my product to friends/colleagues? - Give them a free licence/discounted licence
Are they going to be a pain the the arse? - Point them elsewhere
Martin Pilkington Send private email
Saturday, January 12, 2008
 
 
Bill,

I don't think the mathematics is quite that simple. You're trying to maximise your total revenue. Everybody has a maximum price they're willing to pay. The sales / marketing dream is to sell your product to everybody at the price that each individual will pay. That's the theoretical maximum revenue you'll ever get. There are various, but imperfect, ways of doing that. One is to version your software: have different versions at different prices so people with more money can spend it (one possible reason for the proliferation of Windows Vista versions).

You're right that people don't negotiate on many things, but I do find that people negotiate (or try to negotiate) on business software. You probably won't succeed if you're trying to buy a single copy of Office, say, but if you're trying to buy 1,000 then you might.

- Neil
Neil D Send private email
Saturday, January 12, 2008
 
 
> This must be a cultural thing, because in the U.S. anyway nobody negotiates off-the-shelf products

I remember reading this story (in a business book) about a Vietnamese family who moved to Texas.  When the cashier rang us the first can of food, and it said $0.80, they'd say "I'll give you $0.50 for this can", and so on.  Repeat for 2nd, 3rd, 4th, etc., item in their shopping basket. So the first point is that it is cultural.  The second point was I understand the family did often get stuff cheaper, is that as a customer you can often get a better deal by asking. 

But the other side of this coin, is as a seller, you don't have to negotiate. Especially if you have something that nobody else has to sell.  Remember software is usually highly differentiated, and most of us are looking for ways to further differentiate our offerings.  One application is rarely the equivalent of another.
Sunil Tanna
Saturday, January 12, 2008
 
 
Sunil,

I've read the same story. I think it might have been in "Everything is Negotiable" by Gavin Kennedy. It's worth reading.

- Neil
Neil D Send private email
Sunday, January 13, 2008
 
 

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