One of the golden rules is to take your profit where you can. If you are new to software development, it may come as a pleasant surprise that most software products can provide not one but eight revenue streams. Unless you have deliberately constricted your product, you can derive income from all of the following:
♦ Core products (standard product)
♦ Upgrades (when new functionality is added)
♦ Maintenance contracts (support)
♦ Add-ons (extension products either written in house or by third parties)
♦ Lateral developments (modifying the product for new markets)
♦ Custom-made developments (specialist developments)
♦ Bulk/original equipment manufacturer (OEM) licensing deals (technically, this is the large version of 1 but has to be handled differently)
The wider your income stream the greater the revenue you will generate and the longer your product's life cycle is likely to be. The opportunities that arise from these streams need to be taken into account when you are modelling the core product.
Upgrades, incidentally, are typically charged at 60 percent of the recommended retail price (RRP). Maintenance is rarely more than 30 percent.
Add-on prices are dependent on the extra value they offer, yet it's hard psychologically for them to achieve RRP prices in excess of 50 percent of the mother product. If you price the mother product too low, it may not be worthwhile for anyone to create add-ons, no matter how badly they are needed.
Lateral and custom-made development together with consultancy rarely happen with under-priced programs, mainly because of perception. If you're selling a product for $25 you're clearly running a manufacturing operation. Servicing is just unrealistic. If, on the other hand, your product sells for $2,500, clients will assume that you do custom work for it all the time.
Bulk OEM licenses are a law unto themselves. Each one needs to be negotiated to maximize profit without compromising your future. For deals of 10,000+ units or $500,000+ (the discounted price, not the RRP!) initial, guaranteed order, you are typically looking at sealing the contracts at a 75-80 percent discount off RRP. It's yet another reason to set your core price as high as the market will bear.
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