I recently gave a presentation to the UKCFUG entitled “How to make and sell software products”. This talk was sponsored by Fog Creek because I offer training in the UK and Europe for FogBugz and Kiln. I thought I would write a bit more about software pricing and then I found that Joel Spolsky of Fog Creek had written an article already.

“Camels and Rubber Duckies” gives a great introduction to demand curves and is very worthwhile read. Joel wrote it in 2004 and it is a true now as it was then. Rather than reproduce his content I will build on it. So read it first and then read on…

Done that?

OK, well 2004 was a long time ago and although Fog Creek does not offer site licences it does offer “flat rate” pricing once you have 24 users. How do we understand this in terms of price demand curves? We need to consider not the market but the individual customer. As customers consume your product their willingness to pay decreases. Consider pizza. I will buy one pizza for $ 10, a second for $ 5 and a third for only $ 1, but then I DON’T WANT ANY MORE PIZZA. Well it’s like that with FogBugz (and any other software product), when even the boss’ secretary has it they won’t buy any more. “Site Licences” and “Flat rate” pricing are an attempt to match your pricing to this reality.

The more important point though is that Joel’s exposition of economic theory only holds when you have market power. In perfectly competitive markets there is no consumer surplus and you just wasted your time learning all this stuff.

You know when you have market power because when you meet your peers you are respected as a “player”. For example, FogBugz is now one of a handful of bug tracking products and its pricing decisions are important in the market.

That’s fine for established software products but what about start-ups like mine and Chris’ that produces software for Android phones? Nobody cares about our pricing decisions, we have no market power at all.

The approach that we are taking  is branding and volume; if we can flood the market with a strongly branded product, our pricing power will increase. Angry Birds on Android is a good example of this approach. The first version was free and built the brand. They will now have little problem introducing pay-for alternatives even though there is extreme competition in the Android games market.

This is only one of many possible approaches and I welcome your comments. Subscribe (top right) to keep updated with my progress.