MTAT.03.244 Software Economics Lecture 9: Software Pricing
MTAT.03.244 Software Economics Lecture 9: Software Pricing
MTAT.03.244 Software Economics Lecture 9: Software Pricing
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<strong>MTAT.03.244</strong><br />
<strong>Software</strong> <strong>Economics</strong><br />
<strong>Lecture</strong> 9: <strong>Software</strong> <strong>Pricing</strong><br />
Marlon Dumas<br />
marlon.dumas ät ut . ee
Outline<br />
• Economic Factors of <strong>Software</strong> <strong>Pricing</strong><br />
• Case Study: Nuway <strong>Software</strong><br />
Warning: This is a discussion-oriented class, if<br />
you don’t discuss, there’s no class…<br />
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Information Goods<br />
• IT products have an unusual cost structure:<br />
– High fixed costs of production<br />
– Low or zero variable costs of production.<br />
• Example: a well-known software company spends<br />
100s of millions of dollars developing each version<br />
of its OS. Once a first copy of the OS has been<br />
developed, it can be replicated almost costlessly.<br />
• This cost structure characterizes a class of<br />
technology products termed information goods.<br />
• It includes software, but also electronic video,<br />
music, books, …<br />
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<strong>Software</strong> versus Information Goods<br />
• In addition to being an Information Good,<br />
software has additional characteristics:<br />
– Sometimes needs to be developed uniquely for a<br />
customer<br />
– Can be useless without other elements such as<br />
training, support or business process change<br />
– Sometimes highly tied to data (e.g. mapping software)<br />
– <strong>Software</strong> is often stacked in top of software…<br />
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<strong>Pricing</strong> Strategies for Information Goods<br />
• Fixed-fee pricing<br />
• Price discrimination<br />
• Bundling<br />
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• Flat perpetual fee<br />
• Flat periodic fee<br />
Fixed-fee <strong>Pricing</strong><br />
• When to choose which?<br />
• What price should we charge?<br />
– Depends on the cost,<br />
• Fixed cost<br />
• Variable cost (e.g. support)<br />
• Maintenance cost!<br />
– But also on the demand curve, see example at:<br />
http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html<br />
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Fixed-fee <strong>Pricing</strong> (cont.)<br />
• Limitations of fixed-price<br />
– Does not take into account customization / assumes<br />
all customers are the same<br />
– Does not capture consumer surplus (good and bad)<br />
• Leads to price discrimination…<br />
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Price Discrimination<br />
• First-degree price discrimination<br />
– Price depends on the customer<br />
– Mass customization / personalization<br />
– Does it apply to software?<br />
• Second-degree price discrimination<br />
– Price depends on “product variant” or purchase volume<br />
– Price differentiation based on quality or usage/volume<br />
– Example of quality-based price discrimination:<br />
http://www.membershipadmin.com/<br />
– Example of volume-based discrimination: site licenses<br />
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Price Discrimination (cont.)<br />
• Third-degree price discrimination<br />
– Different prices for different groups of users<br />
– Examples: private users versus commercial users,<br />
student/academic licenses, geographical regions…<br />
– Can you think of others?<br />
• Price discrimination based on purchase history<br />
– Old versus new customers<br />
– Upgrades versus new licenses…<br />
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Bundling<br />
• Selling multiple goods for a single price<br />
• Example: what software am I using now?<br />
• Sometimes, software and hardware are<br />
bundled…<br />
• Sometimes (perhaps not often enough),<br />
software is sold with guarantees it will work…<br />
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Other Factors Affecting <strong>Software</strong> <strong>Pricing</strong><br />
• Competition of course…<br />
• Lock-in and switching costs<br />
• Standards and open-source alternatives<br />
• Piracy<br />
• Network effects:<br />
– Demand for a good depends on how many people<br />
acquire it, e.g. 3G mobile phone, Skype, …<br />
• System effects<br />
– Some products are useless unless they are combined<br />
with other products to form a system, e.g. products<br />
without support and training may be useless<br />
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Group Exercise<br />
• Think of a software product with a non-trivial<br />
pricing<br />
• Check out their pricing model, discuss why is the<br />
software priced the way it is…<br />
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Nuway <strong>Software</strong> Case<br />
• Nuway is a 4-year-old company selling highly<br />
customized software, but based on common<br />
toolkit<br />
• Products sold are non-mission-critical<br />
• <strong>Pricing</strong> model based on cost + margin<br />
• Should Nuway start selling its Nulogic toolkit as<br />
a software package?<br />
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Class Discussion (in groups)<br />
• Enumerate arguments for and against productbased<br />
marketing of Nulogic? Do you favour or<br />
oppose this move? What additional information<br />
would be helpful in making a decision?<br />
• If Nulogic was marketed as a software package,<br />
what pricing model would you adopt?<br />
• If Nulogic was not marketed, what other<br />
opportunities exist to capitalize on the existing<br />
Nulogic investment?<br />
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Further Reading<br />
• Paper by Hal Varian on “<strong>Economics</strong> of<br />
Information Technology” (see readings list)<br />
• Messerschmitt & Szyperski: “Marketplace Issues<br />
in <strong>Software</strong> Planning and Design”<br />
– http://www.eecs.berkeley.edu/~messer/PAPERS/03/<br />
Mkt-issues-sftwr.pdf<br />
• Informal discussion board on “The Business of<br />
<strong>Software</strong>”:<br />
– http://discuss.joelonsoftware.com/default.asp?W1341<br />
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