Don't just roll the dice - a usefully short guide to software pricing

Tweet

In 1938, two young engineers were ready to launch their first product. They'd struggled with what to build. After considering amplifiers, radio equipment, air controllers, harmonicas and even muscle-building electrodes for housewives, they'd finally decided to create an oscilloscope. Not wanting customers to be put off by a version one product, they sensibly called it the Model 200A.

The next step? Decide the pricing.

They eventually settled on $54.40. Was that because it represented the cost of manufacturing, plus a decent markup? No. These engineers hadn't taken that into account. In fact, they soon realized that the cost of building each oscilloscope was more than the price they were asking. Was it based on what the competition charged? No. They hadn't bothered to discover that General Radio charged $400 for an equivalent model.

They chose $54.40 because it reminded them of the 1844 slogan used in the campaign to establish the northern border of the United States in the Pacific Northwest ("54" 40' or Fight!").

What a dumb-ass way to price a product.

But these two young engineers recovered from their stumble. The Model 200A went on to become the longest-selling basic electronic design of all time, still selling 33 years later. The company they founded became an institution. Their names? Dave Hewlett and Bill Packard.

If Hewlett and Packard, two Stanford graduates with the rosiest of futures ahead of them, can flounder so badly when faced with the problem of how to price their products, what hope do the rest of us have?

Quite a lot, as it turns out.

You can read more in the free eBook of Don't just roll the dice - a usefully short guide to software pricing.

Tweet

Subscribe to the RSS feed

Comments

[Patrick Kristiansen]

Congratulations on your book.

Do you happen to know, by the way, where to find that original business plan of Hewlett and Packard? It seems to have been taken offline.

[Neil Davidson]

Thanks Patrick!

I e-mailed the HP corporate archives and they sent me a copy (which I can't distribute unfortunately). You can find contact details here.

Neil

[Andy Brice]

Interesting read, thanks.

Studies have shown that branded painkillers actually work better than generic ones when subjects know which one they are taking, due to a stronger placebo affect. So more expensive painkillers are better - in a weird sort of way.

"CPM – the cost per thousand impressions – can be as low as a dollar"

It might be useful to quote that in a blog post I am working on. Where did that number come from?

Ps/ Minor point - I didn't like having the page numbers in the middle of the page.

[Neil Davidson]

Andy,

For the CPM I Googled around. Social networks seem to have the lowest CPM (eg see here

Thanks for the feedback about the page numbers!

Neil

[Ubaidullah Nubar]

Interesting read. Learnt quite a few things. Thanks a lot for making it freely available.

I found some minor typs. Where do I send them?

Regards,
Ubaidullah.

[Neil Davidson]

Ubaidullah,

Glad you enjoyed it. You can send typos to me at neil.davidson@businessofsoftware.org

If you enjoyed it could you post a review on Amazon? You can find the links at http://dontjustrollthedice.com

[mobil bekas]

Thank you. It's a good resources

[Duncan Jones]

Very good introduction to the topic, Neil. You may be interested in my more in depth analysis of how to choose the right pricing metric, "The Five Qualities Of Good Software Pricing" on Forrester's web site. I'm a strong advocate against hardware-based metrics such as per proc, for various reasons. So I'd urge your readers to think carefully about that pricing aspect.

You've clearly aimed at people trying to sell to consumer/ small business market. I didnt quite agree with the brief section on Enterprise pricing, because it failed to take selling costs into account. Once you get beyond individuals buying for their own use, and get to a full sales process, you want to get as much as you can while you're there, rather than have to make another visit.

[Nathan]

"What a dumb-ass way to price a product."

Hahah, you said it.

[Tushar]

I have just published my review of book Don't just roll the dice at http://architecture-soa-bpm-eai.blogspot.com/2010/05/book-review-dont-just-roll-dice.html.