Joel on Software Pricing

Joel Spolsky publishes a good piece on the art of software pricing. As he points out, the more you learn about pricing, the less you know. He's right on, it's a tough task by all accounts. Software, unlike most other products, is generally priced based on what someone is willing to pay for it, not based on what it's marginally worth. Yes, that's confusing.

When you're setting a price, you're sending a signal. If your competitor's software ranges in price from about $100 to about $500, and you decide, heck, my product is about in the middle of the road, so I'll sell it for $300, well, what message do you think you're sending to your customers? You're telling them that you think your software is 'eh.' I have a better idea: charge $1,350. Now your customers will think, 'oh, man, that stuff has to be the cat's whiskers since they're charging mad coin for it!'

He goes on to suggest the importance of client segmentation, a dangerous but very common practice for large scale enterprise software companies.

Joel also presents a three way pricing model: free, cheap, and dear:

Free. $0 - $10, Open source, not relevant to the current discussion. Nothing to see here.
Cheap. $10 - $1,000, sold to a very large number of people at a low price without a salesforce. Most shrinkwrapped consumer and small business software falls into this category.
Dear. $75,000 - $1,000,000, sold to a handful of rich big companies using a team of slick salespeople that do six months of intense PowerPoint just to get one goddamn sale. The Oracle model.

The key concept Joel points out using this troika pricing model is that there's no software priced between $1,000 and $75,000. Basically, anything costing more than $1,000 is generally subject to a more comprehensive corporate approval. Read on, it's fun & insightful.