Factors Influencing Pricing Strategy

Software product pricing is highly unstructured. Various factors such as expenses related to implementation, customization, annual maintenance contract and upgrades have to be taken into account to arrive at the final cost structure of a software. The stage in Product Life Cycle during which it is being priced matters. Further software products maybe domain specific and function specific. For example a banking product, healthcare product, CRM, ERP, etc. There is no one definite way of pricing it. It is highly product orientated and organization orientated. Sometimes pricing can be used as a differentiation strategy adopted at organizational level. It is strongly influenced by competitor’s activities.

In general,

• Products can be sold and service can be charged separately on a monthly or annual basis.
• Product can be bundled with free services for a definite period of time and sold as a single package
• Sold as licenses that will need renewals based on whether it is Desktop or Server installations, etc

Product pricing reflects marketing strategies used to penetrate into markets. Accordingly it could be either a penetration pricing strategy or skimming pricing strategy. It is always possible that just to increase product awareness price is drastically reduced and targeted at specific groups who have been identified as potential buyers. The discount criteria applied may vary between the groups identified. This is also a means to gain first-hand experience in buying trends, buyer characteristics and buyer requirements which can help in customizing products to suit a particular segment. So, by selling at a discounted price, buyers can be assessed which will help in fixing a price and the nature of discounting to be applied to that particular group in later stages. However, there are many software companies who prefer skimming pricing strategy which involves selling the product at a high price initially and then reducing it as they come up with newer versions. That way they are setting the shelf life for their own product in market. Once again, this is highly intrinsic to organizations and their way of cutting through competition.

The Product life cycle plays a significant role in deciding the price of products. In case of software products, versioning can be used to keep the product sales running for some time. But in some cases it can’t last for long as the very need for the product to perform the core activity that it is built for may not be needed anymore. For instance consider the large pool of free software available on internet. Just a few years ago, many leading software product companies associated themselves with their free versions to sell the improvised versions with advanced features. As the market is maturing, the cult is slowly changing and the freeware activities are gradually diminishing. They are more interested in selling the products now as the market is saturated with free software and people are looking for more features. This obviously results in better sales, but quicker satisfaction. Pricing therefore plays a key role in such circumstances and if there is a discount criteria applied on a bundle of products and services, it may sell more. It is one way to keep sales going. Versioning may be helpful again once this stability is gained and newer areas of improvements have been identified.

Another classical example is 3D Video Games. This is a highly trendy industry demanding  very quick adaptations to technological growth and user preferences. Games may be targeted at different genre and content is reflective of it. This influences pricing strategy. Product maturity is very common in this part of the world as people wake up to new games and new dimensions almost every quarter. For instance the recent launch of Nvidia 3D Vision which uses ‘The Way It’s Meant To be Played’ program and uses the latest version of its GPU v295.51 has created massive competition in market. A few 3D games available on their shelf include Batman: Arkham Asylum, Duke Nukem Forever, Aion, etc which is reflective of movie trends and anticipated changes in buyer preferences to have more advanced graphics features. The pricing has been set accordingly to differentiate itself in market.

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