Never Undersell Yourself

As previously explained, software prices tend to be lower for historical reasons than strict arithmetic justifies. Entrepreneurs tend to try to amortize development over too long a period or share costs among more customers than ever materialize. They omit the unavoidable on-going costs of product maintenance and development.

When people are scared that their product won't sell, they tend to convince themselves that if they make it cheap it will walk out the door. In this case, keep your market research in mind. Good market research should give you some indication of the real thresholds.

If you set the price of your software too high at the start, it should at least have a quality image. If you have to, you can always lower the price later. You have only to rationalize the reduction on grounds that it's "owing to heavy demand and the economies of scale." No one ever complains. However, try it the other way around and there will be grumbles, complaints, withdrawals, and you will soon realize that the only thing you can do is enhance the product and re-launch it under another name. This is a very expensive process and hardly anyone does it.

Remember, unless you are selling direct, you only receive a fraction of the retail price. Suppose you are selling a product for $100. If you end up halving the price you must sell more than twice as many units to net the same profit because you encounter increased freight, accounting, and support costs. Distributors and dealers might give up on the product or renegotiate a tougher deal to compensate them for their additional work. Table 13-3 demonstrates the profit differential if you reduce the product price by half.

Table 13-3 Profit Comparison

Components

$100 product

$50 product

List Price

$100.00

$50.00

Freight per unit

-$2.00

-$2.00

Insurance

-$0.20

-$0.10

Distributor Discount

-$60.00

@ 60%

-$30.00

@ 60%

You receive

$37.80

or 37.8% of RRP

$17.90

or 35.8% of RRP

Note Remember, a high price signals to potential competition that this is a lucrative mar ket; set a lower price point and you might ward some of them off—this is a hard call but you have got to get it as right as you can.

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