Advice on Pricing Your Software Product

This is a guest blog post from the brilliant Nicholas Laborde. He's trained in business with an MBA and specializes in developing business for game studios. He owns the indie game studio, Raconteur Games, and is Chair of IGDA Lafayette. You can visit his website at http://nicholaslaborde.com . Original Twitter thread is here.

I like to define business as two words: perceived value. Something is only worth what someone is willing to pay! Simple, right? Where it gets complicated is determining the value for different customers, on different scales, in different situations, who are at different stages of their processes, and who will use your service differently.

Welcome to business!

My name is Nicholas Laborde, and I had the pleasure of speaking with Stephanie about issues concerning pricing her incredible texture compression technology Basis. I’m an indie developer with an MBA who loves the business side of things, and this was fun to dig into! The challenge was a daunting one, and I hope that what I suggested will help Stephanie with her strategy in bringing this incredible technology to as many people as possible. After all, 4k isn’t cheap! (That’s my lame engineering joke, because we’re talking about business, but the product is about resources, and... and... alright, back to business.)

In thinking of this situation, we have to consider a multitude of variables:

  • Who is the customer?
  • Who are we selling to?
  • When in their process will they use it?
  • How do we differentiate between different types of customers?
  • What is a fair pricing methodology for different scales of operations?

My challenge was examining and suggesting models that made sense for what Stephanie is trying to achieve. We certainly can’t just give it away, but at the same time, we don’t want to have an arbitrarily high price solely for the sake of money! Finding the intersection of these pricing considerations, as well as the business model driving these deals, was my task.

Price is not something that can be easily determined. The financiers will tell you intense financial theory behind pricing (vivid flashbacks of agonizingly calculating stock price by hand in my MBA finance course came rushing back... thanks Dr. B!). The accountants will tell you to just add on a certain amount to your costs. The managers will tell you to do whatever makes the most money (and makes them a nice bonus). The customers will tell you to give it to them cheap. Who do you listen to?

There’s no easy answer. At the end of the day, pricing is a function of 1) the inputs the creator has put into the product or service, 2) the desired threshold at which the company can continue its operations at various levels of sales, and 3) the long-term goals of the company and what they hope to achieve by creating and selling this product or service. With Stephanie, I wanted to give advice on what would set her up for a sustainable system that will service untold numbers of developers worldwide in a variety of scenarios.

With a product like Basis, it could be used in such a variety of situations, so a model had to be developed that made sense for most scenarios, and was flexible enough for the rare outliers. We could take the approach of Basecamp CEO Jason Fried, where there’s a hard line drawn in the sand saying, “Our product costs this much, no matter who you are. End of story.” That’s certainly an easy way to manage a product at a huge scale, but that wouldn’t be in the best interests of Basis! Especially when customers can vary from one-person indie studios to massive AAA operations, that isn’t ideal.

At the same time, what about a price bracket? We could measure usage and put users into tiers of data compression usage. Maybe a low tier for indies, a mid-range one for bigger operations, and an enterprise solution for massive companies. Based on how much data is being compressed, Basis could be sold on an annual, recurring, or per-project basis to fit a variety of needs. Additionally, we could factor in employee size and/or company revenues to fit a specific price bracket.

Wait! What if a customer is making a massive 4k 100gb game with a studio of less than 10 people? Are they the small tier because they’re a small operation and we don’t want to overcharge them, or are they an elite customer using a huge amount of data and as such must be slotted into the highest tier?

These are all complicated questions and are situations that will continue to surface. There is no clear or easy answer, but the moral of the story is this: Pricing is confusing, and there is no quick answer. What I recommended to Stephanie, and what I also recommend to you as entrepreneurs and business owners, is to determine a few things:

  • What is my short-term revenue goal?
  • What is my long-term operational goal?
  • How does the short-term goal get me farther down the road towards my long-term goal?
  • What can I do to succeed at both the short-term and the long-term levels to please my customers, while also covering my operational costs?

Finally, what is the threshold of sustainability? At what point am I “good” enough to achieve my current goal post of success, and could grow/expand to the next level?

By asking yourself these questions, any entrepreneur will have a thoughtful reflection on creating a pricing system that makes the most sense for their business, their product or service, and their customers. It takes far more work than “If you build it, they will come”; but by considering the customer, knowing the market, and being aware of your short- and long-term goals, everyone can walk away with a win.

A big thank-you to Stephanie for allowing me to provide insight, and to you for reading. You can learn more about me and my work by visiting my twitter at @ChiefRaconteur.

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