How to Determine How Much to Charge for Your Software Setting the right price point can make or break your business.
By James Parsons Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Anyone who has ever had to comparison shop for a business app knows that prices are often all over the map. Two programs that provide roughly the same features can have wildly different pricing. Where do these prices come from, and what should you use as a precedent for pricing your own software?
Related: Why Some Prices Are More Right Than Others
The simple fact is that there's no "best price" for any piece of software. It all depends on your business model, your potential audience and customer base and your competition. Determining your ideal price point means analyzing these and other factors.
Single license or monthly fee?
One of the first questions to ask yourself is whether you're going with a single one-time purchase for a license, or a monthly fee for a software-as-a-service model.
Web apps have pushed the monthly fee on consumers more and more in recent years, so much that it's rare to see a modern program you can simply purchase. Even software packages that historically have been single-purchase, ranging from Adobe's creative apps, to video games, are increasingly riding on monthly fees.
Monthly fees have the benefit of a higher profit, assuming your subscribers stick around long enough to pass the break-even point for a single license fee. The lower buy-in is also more likely to attract certain types of customers, notably individual entrepreneurs and small businesses with smaller budgets.
On the other hand, there's usually a perception that a lower-priced product is somehow not as good as a higher-priced product, and this has led to brands purposefully pricing their software or products higher. This may price out customers who can't afford the higher price point, but the higher profits make up for that loss.
The argument in favor of a single purchase price relies on your program being, well, a program, rather than a web app. If the user has to purchase the software, install it locally and maintain it locally, and you don't have to maintain web app servers or push micro-updates, you're more likely going to get away with a single fee.
Related: 8 Pricing Strategies for Your Digital Product
Study the competition.
Competitive analysis is always an important part of selling any product, and choosing a price for your software is no different. You want to know what other brands are out there offering similar software, and what prices they're selling it for. Answer these three questions for each competitor:
- What price model and price point is the competitor using?
- What features does the competitor offer that you do not, and what do you offer that the competitor does not?
- What kind of audience is the competitor targeting?
Two nearly identical apps can have very different price points and both be successful, simply by targeting different audiences. One targets small business customers and succeeds via volume, while the other targets enterprise customers and succeeds via price. Neither model is inherently better than the other.
In fact, a higher price point is often essential to attracting an enterprise-level customer. These companies are used to paying hundreds or thousands of dollars a month for their business-class services, so they often won't even consider products they consider too low priced. In their minds, a company charging that little may appear unlikely to be able to handle a larger customer, or the quality of its service may appear to be lower.
Incidentally, this is also why many consumer products that cost under $1 to make are still priced at $20; they sell more than they do when they're priced at $5 or $2, because the lower prices make consumers think they're cheap or defective.
Determine your minimum.
Your product should have an absolute minimum price point you can use as a guide. For software, this is tricky to calculate. With physical products, you can simply calculate the cost of the raw materials, the production of the item and the other costs that go into designing and shipping the item.
Related: How to Choose a Pricing Strategy for Your SaaS Business
With software, you don't have raw materials or even shipping, most of the time. Instead, your primary metric is the hourly fee and number of hours charged by your developers. For SaaS products, you also have to consider server upkeep, ongoing development and other such costs.
Calculate the raw cost of your product as a whole, and determine what a reasonable number of customers would be. Divide the cost by the number of customers to figure out how much each customer would have to pay, to break even.
There will likely be several different models you can calculate here. What if your customers are retained longer, or you have fewer customers than expected, or you charge a little more? Where do you anticipate the sweet spot to be? Customer-expected return on investment for SaaS is already complicated.
Don't be afraid to test.
In marketing, we split-test everything to do with our ads and our landing pages. Why not do the same for software pricing? It's your company and your software; you can change your pricing whenever you like.
So, start low and raise it as you go, until new customers start dropping off. You can bill on an "introductory rate" basis. Alternatively, start high and gradually decrease the pricing, with some incentive to placate your long-time customers. You can even simply unveil new pricing tiers with new features, or lower-priced tiers with fewer features, and see how they perform. What features are attracting the most value?
Through careful analysis, the study of a variety of factors and plenty of gut instinct, you can determine an appropriate pricing level for your software.
