software, value, pricing, economicsThe prices of software space a lot: from 1€ on markets like Google Play to 35$ of software like DisplayFusion, RegexBuddy, PowerGrep, Evernote going to some hundreds of euro (Resharper, Ndepend) and arriving to some thousand of euro (Toad, Visual Studio Ultimate).
In economy we study that it’s not only a matter of costs of research and production. The pricing of products can be regulated by the Marshallian and Walrasian model of pricing.
However my knowledge of economy are very limited and I wonder if it could be a winning choice for small companies like the one which sell DisplayFusion, RegexBuddy and so on to sell their products for very cheap prices. Especially to private customers.
Realistically, this question has no answer. There are so many factors that play into this that there is no answer for a general “small company”. What companies try to do is find where the supply and demand curve intersect, so that they can make the most profit. Think of it this way:
Suppose DisplayFusion were to sell their product for $1, 100 people would be willing to buy it at that price. If DisplayFusion were to sell their product at $35, 3 people would be willing to buy it at that price. Which price should they sell the product at?
With no other factors coming into play, they should sell their product for $35 since they will make an extra $5.
However, many other factors can play into pricing. Take for example iPhones. Not only does Apple make money off of selling the iPhone, but the also make money off of people buying the apps for the iPhone. In this case, widespread adoption can be more important than the original profit from buying the iPhone; a larger user base makes it more likely that more people will buy more apps and therefore make Apple more money.
There are MANY other factors that will also play into pricing (such as marketing, competitor pricing, cost of production, etc.).
As you can see. There is no clear cut way to answer this question by saying anything other than “It depends what will make the company more money”. Figuring out pricing is one of the most difficult parts of business.
Your question is why some companies charge high prices. The simple answer is because they want to make money.
The slightly longer answer goes, Great software gives high value to its users: smart pricing reflects this value.
A lot of economic pricing theory is primarily thinking about tangible goods, with clearly-defined utility, sold through markets satisfying the conditions of transparency. So beware applying the theory to software markets in general.
That said, you can often get interesting insights by running the argument in reverse. Why is Toad super expensive? Well, the price is going to reflect the perceived value, but it’s also evident that it also reflects the cost structure of an enterprise sale. Why is Resharper so much more expensive than some .NET development tools, and so much less than others? Again, the price reflects perceived value - the tool saves me time and embarrassment - but it rather more clearly gives you a clear view of how much a .NET developer can spend on their own discretion or readily justify to their boss!
If you look at contemporary app markets, pioneered by Apple’s App Store, what you see is precisely that (somewhat) transparent marketplace that economics wants to find in order to apply its ideas. And sure enough, the overwhelming volume of app purchases go through at the price of $0, which is a very good approximation of the cost of duplicating a stream of bits. Look closer, and you will see a huge range of pricing and monetization strategies playing out.
When someone asks me how to price their product, the first thing I say is this: “The best price is the highest effective price.” And in my experience, most startups creating real value will have a better ride if they aim high and work hard than if they aim low and hope hard.
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