WP Text Ads Blog

I love to read the Business of Software forum, and a couple of questions that come up repeatedly are:

• “My software currently costs $X. Should I lower it to $Y to boost sales?”
• “How do I know if I’m charging too much or little?”
• “How much can I expect my customers to pay?”
• “Why are people buying from my competitors who charge twice my price even though we have similar features?”
• “Are customers sensitive to changes in price?”

At the root of these questions is the fundamental question - “How do I price my software?” I’d like to offer 3 steps that any microISV can take to price their software.

1. What problems does my software solve?

A common problem with microISVs is that they they forget that software does not exist for it’s own sake. (Ok ok, I admit there is software that’s written for fun, but we’re not talking about those here.)

If you want to make a living selling software, it must take away a customer’s pain to make it worth his effort to buy it. Do note that I am emphasising on pain and not pleasure. Although people will also pay to gain pleasure, they are usually more willing to pay up for their pains to be taken away.

Therefore, if you cannot figure out what problems your software solves for people, then you do not have a business, only a hobby. But do not give up hope because Yahoo! and Google have made it a priority buying hobbies.

2. How much will it cost my customers to solve them without my software?

   You should be able to estimate this amount. If it’s a long-term and recurring problem, calculate the cost up to a year ahead or you’ll soon be charging infinity!

   The simplest way to estimate this amount is to find people who have problems that can be solved by your software. Ask them what they’re doing to get around it now and what it’s costing them. Then average those numbers.

3. Price your software at that cost

The last step is to use that figure in step 2 as your base price.

The most important thing you have to do after you arrive at this figure is to explain to people why your software is worth that money. Use the facts you gained while speaking to people to understand their point of view, and explain your price according to how they see their problems.

Do not assume people can do a cost and benefit analysis without your prompting. Most people follow their impulses, so you need to provide them with a logical decision-making framework.

I’ll now use these concepts to provide answers to the 5 questions at the beginning of this post.

• My software currently costs $X. Should I lower it to $Y to boost sales?

  Assuming that your software takes away pain, then drop the price only if $X is much higher than the dollar amount you derived in step 2. Sometimes, people won’t buy if you’re too cheap because price determines how people look at the quality of your product. The phrase “you get what you pay for” comes to mind here.

  Sales should increase as your price becomes more in line with the cost of their pains. Nonetheless, take a hard look at your website, marketing copy and marketing strategies too. They play a significant role in influencing the demand for your product.

• How do I know if I’m charging too much or little?

  Is the dollar value you found in step 2 vastly different from your current price? Are your long-surviving competitors charging much higher or lower than you? These are clear signs that you need to raise or drop prices.

• How much can I expect my customers to pay?

  As much as the dollar amount you found in step 2, and perhaps 10%-20% more. Don’t push it too far as you need to strike a balance between having many people buy a lower-priced product versus fewer people buy a higher-priced product.

  Although your aim is to maximise profit, you should also keep in mind that if you have 100 customers and you lose 10 of them, that’s 10% of your customer base. But if you have 1000 customers, then 10 customers is only 1%.

• Why are people buying from my competitors who charge twice my price even though we have similar features?

  That’s probably because they know how much people are willing to pay for their pain to be taken away, and you don’t. They also know that ‘cheap’ is not good for business. ‘Affordable’ is.

  Raise your prices immediately.

• Are customers sensitive to changes in price?

  That’s a tough one to answer. Do their problems change over time? If it’s seasonal in nature, then your price may have to change accordingly.

  But rather than changing your prices occassionally, it’s better to stick with the high price and give discounts instead. You can also cross-market your product with other folks’ products to offer an affordable bundled price. In situations like these, creative marketing is a better strategy.

Well, I hope this article has provided you with a usable framework for pricing your software. In a future post, I will explain how I decided on the price of WP Text Ads Standard Edition and answer the question “Are you mad to price WP Text Ads at $127?”

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About the author

I'm Alex Choo and I live in sunny Singapore. I'm also the developer of WP Text Ads, a WordPress plugin that lets bloggers sell ads directly to advertisers so that they pay 0% in commissions and earn 100% in profits.

Feel free to drop me a note anytime you wish. You should also subscribe to the low volume email announcement list for WP Text Ads below.