August 5, 2009
One of the side effects of using the iPhone App store so much is that it's started to fundamentally alter my perception of software pricing. So many excellent iPhone applications are either free, or no more than a few bucks at most. That's below the threshold of impulse purchase and squarely in no-brainer territory for anything decent that I happen to be interested in.
But applications that cost $5 or more? Outrageous! Highway robbery!
This is all very strange, as a guy who is used to spending at least $30 for software of any consequence whatsoever. I love supporting my fellow software developers with my wallet, and the iPhone App Store has never made that easier.
While there's an odd aspect of race to the bottom that I'm not sure is entirely healthy for the iPhone app ecosystem, the idea that software should be priced low enough to pass the average user's "why not" threshold is a powerful one.
What I think isn't well understood here is that low prices can be a force multiplier all out of proportion to the absolute reduction in price. Valve software has been aggressively experimenting in this area; consider the example of the game Left 4 Dead:
Valve co-founder Gabe Newell announced during a DICE keynote today that last weekend's half-price sale of Left 4 Dead resulted in a 3000% increase in sales of the game, posting overall sales (in dollar amount) that beat the title's original launch performance.
It's sobering to think that cutting the price in half, months later, made more money for Valve in total than launching the game at its original $49.95 price point. (And, incidentally, that's the price I paid for it. No worries, I got my fifty bucks worth of gameplay out of this excellent game months ago.)
The experiments didn't end there. Observe the utterly non-linear scale at work as the price of software is experimentally reduced even further on their Steam network:
The massive Steam holiday sale was also a big win for Valve and its partners. The following holiday sales data was released, showing the sales breakdown organized by price reduction:
- 10% sale = 35% increase in sales (real dollars, not units shipped)
- 25% sale = 245% increase in sales
- 50% sale = 320% increase in sales
- 75% sale = 1470% increase in sales
Note that these are total dollar sale amounts! Let's use some fake numbers to illustrate how dramatic the difference really is. Let's say our hypothetical game costs $40, and we sold 100 copies of it at that price.
|Original price||Discount||Sale Price||Total Sales|
If this pattern Valve documented holds true, and if my experience on the iPhone App store is any indication, we've been doing software pricing completely wrong. At least for digitally distributed software, anyway.
In particular, I've always felt that Microsoft has priced their operating system upgrades far, far too high -- and would have sold a ton more licenses if they had sold them at the "heck, why not?" level. For example, take a look at these upgrade options:
Putting aside schoolyard OS rivalries for a moment, which one of these would you be more likely to buy? I realize this isn't entirely a fair comparison, so if $29 seems as bonkers to you as an application for 99 cents -- which I'd argue is much less crazy than it sounds -- then fine. Say the Windows 7 upgrade price was a more rational $49, or $69. I'm sure the thought of that drives the Redmond consumer surplus capturing marketing weasels apoplectic. But the Valve data -- and my own gut intuition -- leads me to believe that they'd actually make more money if they priced their software at the "why not?" level.
I'm not saying these pricing rules should apply to every market and every type of software in the world. But for software sold in high volumes to a large audience, I believe they might. At the very least, if you sell software, you might consider experimenting with pricing, as Valve has. You could be pleasantly surprised.
I love buying software, and I know I buy a heck of a lot more of it when it's priced right. So why not?
Posted by Jeff Atwood
Another good example is the macheist Software Bundle. They sold over 88,000 copies.
What about the cost of producOH WAIT it's virtually free. Well played.
Let's not forget that most if not all iPhone apps are games or entirely useless applications, priced at "why not?" level. I read somewhere that customers rarely use these apps more than once.
The effect is known as price anchoring.
From http://en.wikipedia.org/wiki/Anchoring :
"Consider an illustration presented by MIT professor Dan Ariely. An audience is first asked to write the last 2 digits of their social security number, and, second, to submit mock bids on items such as wine and chocolate. The half of the audience with higher two-digit numbers would submit bids that were between 60 percent and 120 percent higher than those of the other half, far higher than a chance outcome; the simple act of thinking of the first number strongly influences the second, even though there is no logical connection between them."
Another reference: http://www.cfo.com/article.cfm/3014027
With price anchored at $40, $10 seems cheap. But $10 anchored the other way might not sound so good: $10 seems expensive compared to an iPhone app at $1.99.
It would be quite difficult to do any serious kind of study about this as there are many factors, one of which is the psychology of the consumer.
An important consideration is the mental footprint of the game and the reputation of Valve in the minds of those people that were aware of the sale. Also, the fact that the game was once $40 makes the $10 sale price attractive. However, if they had started with a $10 price right from the beginning, I doubt their profits would have been the same.
Software companies don't have a fixed price per copy that they sell, at least digitally (except possibly for support costs). Instead, they have a fixed cost for the initial development and then each copy they sell chips away at that development cost.
The important thing to realize is that the person that buys the $40 copy and the person that buys the $10 copy are not the same person. They are two different types of people with different cost / value systems. So, by selling it at two different prices, you make $50, not $40 or $10.
Also, the cost of a game is not really based on anything but the price of other games. I think it would be fair to say that "Grand Theft Auto" cost vastly more to produce than "Space Chimps" but they both retail initially at the same price.
These prices are determined in collusion between console manufacturers and game development studios.
I think the idea of selling windows much cheaper, would hurt sales of their corporate market, which will one day be forced to upgrade from xp(Then again probably not that soon).
Also, in the grand scheme of things, not many people in the world would feel comfortable doing an os re install. Out of everyone I know, only the techys are comfortable doing this, so they are the only people that would buy this product. I recently advised someone to go win 7 beta, even though its just for a year, as they would probably get a nice experience for a bit. This person was an investment banker QA person, which isn't shy of technology, but if he can't do it, then what hope do we have of mass os sales?
Don't underestimate the power of a sale.
Many people will buy something when it is on sale, b/c they think it is a deal and will be cheaper now than in the future.
It would take more study to prove it, but I would be willing to bet that starting at a high price to get more money from early adopters, then later having a sale that will grab the masses attention probably yields more money.
If Left 4 Dead had started at $10 lets say, they would have had a huge launch, but they wouldn't have any room to offer a sale price once the game's sales slowed.
This is a common problem on the iPhone App store. Many apps are popular at first, when they are in the whats new or featured list. However, once they are a little older sales drop dramatically forcing many to have a sale dropping the price from $1.99 to $0.99. Had they started at $0.99, they would be unable to go any lower, and those sales would be lost.
For $20 you greatly reduce your pirated software, who won't drop 20 on a game. MS could reduce their maintenance of old software if they had $30 upgrades. I think almost everyone would upgrade and then you have fewer demands for fixes to the old software. If nobody is using it you don't have to maintain it. And for $30 if they tell you its fixed in the next version your just gonna buy it.
There is certainly a pricing point at which below someone would buy a product, and yes, Windows is a great example. It is even better to compare the 'family pack' of the OSX Snow Leopard upgrade/update: 5 licenses for $49.
I am running Win2K inside a VM on my Mac (I occasionally use it for testing or to run software that only works in Windows, or for which I only have a license for in Windows). I see no compelling reason to upgrade to XP, Vista or W7, especially at the prices MS charges - especially since I use WIndows at home maybe once a month for a few minutes. That said, if an XP/Vista/W7 (pro) upgrade were $50, I would maybe buy it.
I used to write software for a medical software company - very small (I was the only full-time employee). The owner insisted on pricing the software well over twice what he should have sold at ($5K v. about $2K), and he had a lot of problems selling enough copies to pay his expenses (mostly my salary). At half the price he would have sold ten times the software and only had at most about twice the support expenses (which is another issue).
As others have pointed out, there is also other factors, such as 'limited' time offers, initial price (which is why many sellers artificially jack up prices so they can then drop them more - or seem to drop them more) and so on.
But yes, there is definitely a point where someone says 'why not?'
Where that is depends on the product and its desireability. If someone were selling a new Rolls Royce for $5000, they would probably get a lot of buyers who don't need a new car and don't have the $5000 in the bank. If they sold it for $50K, probably not near as many, even though that would still be a super bargain.
amen. I can think of so many examples I would guess the same economics would apply. 1 Password, TextMate, Path Finder a mac replacement finder? Everytime I get frustrated with finder I end up browsing their site looking at their product, but $40 is beyond my threshold. I bet every person I work with would have a copy if it were $5.
The next time I have something to sell, I'd like to try an experiment - list it for a price that would make me giddy with happiness if someone bought it, and then reduce the price by a set, small amount on a set schedule. This way, it's sort of like a reverse auction, and I have a chance of finding close to the optimum price and buyer combination.
There's another danger here as well — if certain software packages are very, VERY expensive, piracy no doubt jumps if they are important to anyone, and the incentive for an open-source solution jumps a lot as well. I'm thinking here of Adobe products, which have long been extremely expensive, and for which nearly everyone who is not making their living using them has pirated them. (The releasing of dumbed-down, crippled versions like Adobe Photoshop Elements has probably not fixed this, though I don't know.)
I looked at Windows 7 prices, thinking about getting a legal copy. For once. And my opinion is that even the cheapest version costs an arm and a leg. (and my freedom, of course)
What you are talking about is economics - supply and demand, and price elasticity. I would suggest you pick up a good book on micro-economics which details this in much more details.
Software is a bit of a simple game… you can almost assume supply is infinite (with software this is sort of the case), so you really just need to focus on demand as the predictor of your software price.
Demand normally isn’t a flat line, where 2,000 people will buy you product if it was a billion dollars, and 2,000 people would take it if it were free.
Instead the relationship is “elastic”. That is what you are explaining… sort of. Elasticity is the change in demand based on the change in price by 1 dollar. That is, does putting your price up by a dollar loose a couple of customers, or does it loose you none?
When that is the case you have to work out if you put the price down by a dollar, are you likely to pick up more customers than you would loose from your current ones. Same thing in reverse for putting the price up, how many customers will you loose?
These answers are based on the market forces and price elasticity of your product.
But really, what matters in the end is the total revenue, which is a function of quantity multiplied by price. This is known as “the DuPont formula” after the company that first invented it. Put simply a fast food chain sells much more food than a five star restaurant
Fast food: High QTY x Low Price
5 Star: Low QTY x High Price
Which is better? Neither is better – they are different models and can BOTH be the same, or EITHER could be better than the other.
So which should you pick? That depends on the market. One model won’t work if it is located in a five star hotel, and the other wouldn’t work if it were placed in a fuel station (Petrol/Gas Station)
I would argue that the market for ERP products equates to a 5 Star restaurant while IPhone apps are the Fast Food of the software game. So they are not comparable and must be considered completely independently.
If you increased price of IPhone apps you would likely loose a lot of customers because that customer base won’t allow for it, but if you increase the price of the ERP software most customers will fork out anyway.
The market is normally very efficient, so you will find that products within each market are priced very accurately. If a vendor puts the wrong price on a product they will know to put it up or down in very short order.
Jeff makes a good point. Although, he needs to keep in mind, if it isn't priced at the higher amount to start with, the discount feels less special and is less likely to have such a big effect.
Interesting findings, thinking about it it all makes sense. By the way, the Windows 7 Home Premium upgrade was $49 for ~2 weeks end of June-July 11, as a "thank you beta testers" sale. I wonder how the sales were effected (other than the fact that IMO Windows 7 is infinitely better than Vista (I would NEVER use Vista), and people have been waiting to get rid of the Vista crap for years).
If Microsoft were to price their basic Windows 7 upgrade at $10 and their full-featured version at $20 I do believe they'd have a very high percentage of their user base running current software by this time next year.
Instead they're going to price the basic version at over $100 and the full version at over $200. This will virtually guarantee that the vast majority of Windows users will still be running nine year old and obsolete XP at this time next year.
Apple must be very very pleased with Microsoft's pricing strategy on Windows.
If game publishers would drop the price of _console_ games, I'm sure there would be a surge in purchases. I remember the first Xbox games, they were around 90-100$. And what are they now? I bought ET:QW last summer for 60~$. And the same game on Steam is 1/2 the price? You pay a price when you're locked in.
The scheme does _not_ applies to MS, which makes most of its Windows sales from bundling it to new computers after pressuring the constructors to ensure they won't seriously propose an other operating system.
Lowering the value of a Windows upgrade would attract the value of the bundled version of Windows to lower levels, which would result in lower revenues for MS, because the volume won't change (or the change will be too small)
Software is too expensive.
Upgrade paths in particular are utterly pointless (I know a few exceptions but I can count them on one hand).
So yes, SW pricing is all wrong.
One thing to factor in is the cost of support: when you have many customers, you also have much greater support needs. I think this is part of the reason companies like products that only sell a few copies for an outrageous amount of money: the support infrastructure required is minimal.
On the other hand, I think people have much lower expectations when they only pay $10 for an application, and you might be able to miff on support a bit.
So, I think your article is probably spot on--the most dangerous place to price your software is middle-of-the road. You get enough customers that you seriously need to consider your support infrastructure, and those customers typically have high expectations for the product.
From an economic theory standpoint, the example is confusing and misleading.
First, because it makes no practical sense w/r to market equilibria: software is essentially a zero marginal cost business, so sales revenue ~= profit, so pricing to revenue maximization should be easy. The first time anyone held a 50% off sale and their *profits* tripled, why would they ever go back to selling at the old price?
Second, because it's an extremely odd way of presenting (and thus thinking about) the results. Following the "curve" thus implied, they should offer the software for free and make infinite profits. The usual way of thinking about this is as price vs. "quantity" (unit sales volume), and there is some maximizing price P* so that the area P*Q is maximized. When you make both the independent and the dependent variable in the graph be a function of the price, it's confusing.
In short, this seems anecdotal and I'm skeptical that it is indicative of any bona fide industry overpricing of software. There are lots of other psychological/non-quantitative effects that go into pricing and could lead to an outsized sales effect (ex: consumer threshold behavior -- there are certain magic price thresholds where sales suddenly take off, like dropping a piece of consumer electronics below $200) but most of those are very well understood by the industries that design products for them.
In short, there is obviously a large monopoly rent component to Microsoft or Apple charging $100+ for an OS upgrade. But monopolies extract rents *because* they are maximizing revenue, not because they are setting their prices too high. Are we seriously to believe that there aren't whole buildings full of people at Microsoft devoted to fine-tuning those price numbers?
also have to poke your nose in at market saturation. Microsoft has reached just about as many computers as its going to reach (exept for perhaps a few people who might want a second computer next to their Mac or Linux boxes.
Microsoft has who its going to have, and most new computer users will end up using it anyway, no matter the cost.. so why would they bother cutting the price? they probably wont sell many extra copies, and certainly not enough to justify.
On the app pricing topic there is definitely a downside to this race to the bottom. People are becoming accustomed to getting something for virtually nothing. Once established that expectation is almost impossible to reverse. i see a day when any application, no matter how complex, will be impossible to sell into the consumer market at a price exceeding $19.99.
Operating systems are no different. Because they come pre-installed and are not shown as a separate cost on the invoice, people think they're free with the hardware. That makes it difficult to sell upgrades. Why should I pay for an upgrade when I didn't have to pay anything for the OS in the first place?
Nothing Microsoft does can alter that perception. People expect to get a free OS with their hardware and no amount of upgrade discounting is going to change that. What's even worse for Microsoft, and the rest of us, is that people are scared of upgrading their OS even when it's free. A large fraction of PCs are running the operating system they originally shipped with, devoid of any updates. It's no wonder malware is running rampant.
Of course you love paying for software, you are a software developer, that's what in spanish we call a "professional deformation", you are so caught up in your own profession that you see everything from a developer's point of view.
However, from the consumer point of view, I don't think it is ok to pay that much for something that ethereal.
I've always believe that there's value in ubiquity, even to the point of giving stuff away for free.
It's also worth noting the fact that when you sell more copies of whatever, you just plain get more users.
I'm not sure how valuable that is, but I suspect it is at least somewhat valuable. In the case of a multiplayer game like Left 4 Dead or Team Fortress 2, more users directly translates into a better overall game experience for everyone, so that's definitely valuable.
Those Steam sales get me every time.
Definitely agree. In the specific case of Windows 7, I have 3 XP PCs that I'd *like* to upgrade, but I don't *have* to. At current Windows 7 prices there's no way I'm going to, so I'm going be waiting until it's time to replace them. If there was a "why not" price MS would have my money in the bank right now.
Revenue is maximized when you set the price to the place on the demand curve where elasticity = 1. I'm sure Microsoft has done their research and knows what they're doing when in comes to pricing.
+1 for the bargain effect.
That, and I want to see if Recaptcha expects me to type the umlaut over the "u" in one of the verification words I see now.
If this comment gets through, it didn't expect me to. ;)
"I attribute most of today's problems with the allowance of the Right-On-Red laws"
Wow, this is a new level of stupid.
I noticed the math error as well. The base price of $4000 was included in the 35% increase, but not in the others. The key word here is increase. An increase of 245% means 3.45 times the amount, not 2.45 times.
In the Valve case, for example, it's hard to tell how many of the people who bought during the sale would have eventually bought a copy at the higher price. We can say for sure that anybody who bought during the sale won't buy another copy later. So how much of the number is *increased* sales, and how much are just time-shifted, and they were simply eating from what would have been their long tail? It's very hard to tell.
The same Valve sales-trick is used with expensive clothing.
One of my friends: "I made such a good deal on these jeans! They were on sale for 80 euros instead of 120!"
Me: "Why don't you just buy them from [some other store] at 25 euros?"
Him: "But these were on sale!1!!!!111"
Me: "That's calculated into the price, they expect to sell it for the sales price and it's still really expensive, and they make a nice profit on it."
Him: "So what, I still made a good deal with the sale."
He just likes to throw money away I guess :)
Using the Valve model, I have actually been buying software I NEVER USE MORE THAN ONCE!
I have purchased about 30 or so games (some really old, some brand new) and play each one for a total of about an hour before I give up on it and go back to Day of Defeat: Souce.
Still... they have my money, and I think I ahve spent less than $100 all up for they lot.
I work at a local computer shop, and we've been saying this for years. We have a lot of customers who aren't running mission critical apps and always WANT to be on the bleeding edge. If Microsoft would price Windows as if they were sane (I think around $45 would be fair), people would be lining up to buy a new version when it hit the shelves.
1) Like others have said, this is not uncommon and indicates that the price elasticity of demand in the video game market could be high.
2) Windows is an OS, and in another market (yes, the 'software industry' may be one industry, but it has many markets), with different market conditions - the least of which is the barriers to ownership for average users. Compare upgrading an OS, which can take upwards of 3 hours after getting drivers etc. and potentially invalidating half of the software you currently use, to installing a game which is usually installed in 20 mins and ready to play.
This looks like a bad comparison. I don't doubt that a decrease in Win7 upgrades would increase sales volume*, but I highly doubt the price elasticity of demand in the OS market is anywhere near as high as it is in the video game market.
*volume = units sold, NOT necessarily net profits received.
Hehe nerd, the $120,- were probably much nicer. For $25,- per pair of jeans you can almost only pay the designer.
The next time you find jeans costing only $25,- you should run away if you care about your presence :D
To answer your question: Yes, you are doing it wrong. And people have been telling you for decades.
As you or anyone else even remotely involved in software (or any other form of IP) pricing calculation can testify there is absolutely no economic relation between the price of a single copy and the production costs. Pricing is determined mostly by (bad) pychology, for instance: Competitor A charges Y, we want our product to be perceived superior to A's product, so we charge more than Y but less than a threshold T because people will think twice if a copy costs more than T. The problem is that this sort of reasoning is barely founded by anything, and if you think about it a little more it seems outright retarded.
The matter has been worsened considerably over the last few years as due to technical progress the monetary value of a copy of a piece of IP has been in free fall. Consider: Today, most people will state about 15 Cent as a fair price for a (DRM free) donwloadable copy of a single song.
The solution is obvious: Give the customers what they want. If you thing you must sell your software by the copy choose a very low price and sell lots of units. Better yet, choose another more future-proof business model.
Agreed!! Totally! And as for the Windows 7.. being released after the failed Vista.. They'd have a better chance at regaining customers by having 2-digit prices on all Windows 7 versions.
One thing to keep in mind is, software is one of those items where the supplier must make an "all in" commitment with respect to product cost up front, and only then is each additional unit made at a lower cost.
As developers we have to be very careful and make sure we perform our due diligence on each potential project, otherwise you wind up in the poor house after a very few all in attempts.
There is a real tradeoff the company is making by dropping their price so much you are not considering. I recently read on Markus Frinds's Blog (plentyoffish.com owner) where he stated that doubling site demand increased his expenses 6x. When a company lowers costs like that, sure they get more revenue temporarily, but their support costs are going to go up. For every 100 customers x% will need some sort of support and that costs real $$$.
As far as teh cost of an Apple upgrade, well they make insane margins on their hardware. So I think comparing their pricing model to MSFT is similar to comparing ink jet printers to laser printers. Lasers cost more up front, but costs much, much less in the long run. Face it Apple is a hardware company first, then software. MSFT has the market share they have because it is more about software and developers, developers, developers (LOL).
Let's say it this way:
a bad quarter at MS 3.000.000.000 $ *profit*
a good quarter at valve - 17.500.000 $ *sales*
yu notice the little difference?
Having a look, i would say it's a matter of preference the customer and their interest to increase sales eventually reporting to the finances.
Jeff, you hit the nail on the head. I was considering upgrading to Windows 7 because of the "why not" factor, until I found out that it was a lot more expensive to upgrade than I thought it would be. Now I won't be upgrading unless I have a significant motivating factor. $119 is just plain expensive.
As for Valve games, I often will pick up new games when they're on sale. For most games I figure "Meh, I can do without them," until they are significantly cheaper. Once they're on sale I say, "Heck, why not?" and buy them. Note that I wouldn't have EVER purchased them if they weren't at a lower price. For me, those game makers are only making money off of me because they lowered the price.
Another issue is that some of us are willing to pay a fair price for quality software, but if we feel we're getting screwed, we may take the less-than-legitimate route to get what we want. When piracy is so high, it makes sense to drop the price. There are those who would pirate the software if the price was too high, but would gladly get a legitimate version if the price is right.
Here is a simpler model for fair software pricing.
How many useful software packages do you know of? Not very many. Most software sold out there is a piece of crap.
Windows OS is an embarrassment to the entire Microsoft community. No friggin update path from Windows XP, still has a "matrix", still the same old shitty pricing model which requires you to buy MSDN subscription if you have more than two PCs. Nothing truly new under the hood, same DLL hell, same fucked up networking which doesn't know how to add itself to a domain and detach itself from the domain without funky consequences. Thankfully, we have VMs now and we can keep the mess well walled-in.
Usefulness of software is very subjective and that's why typical pricing models do not apply. If I had a dollar for every trial version installed (and deleted within an hour)...
Ironically, some of the most useful utilities (such as Reflector.NET) are free. Best antivirus software (for my money) is Kaspersky - also one of the least expensive ones.
I hate Word but I use it for compatibility (all my clients use MS Office). Office is not "bad" but it is bloated and awfully expensive for what it does.
Quicken software (all of it) is excellent - it does the job and it does not cost the Earth.
Firefox - best browser on any platform. free.
I don't know about games, but I'd say that's like buying chewing gum at the checkout. You think you like it, need it, one chew and you spit it out. Next. Few games are even worth mentioning let alone playing. But even that is subjective.
Can't read the fukken captcha. What kinda software is this? "Speak captcha" is a joke. Have you tried it?
I actually sort of agree with Mike above.
Once customers expect software for a low price, it's impossible to raise the price again - because customers have come to expect the lower price.
Part of the problem, however, is that it only takes one fellow willing to lower his price more than the others, to establish a new floor for price.
It's kind of a prisoner's dilemma with millions of programmers playing.
Your article is informative and factual.
Software was/is/and always will be a huge rip-off.
After software makes back it's total development cost, the price should drop like nobody's business. But greed stops this in most cases. It's called Capitalism.
Hi Michael.. Your post got me thinking... What is more valuable for a software company (like facebook or flickr). 1,000 paying users or 100,000 non-paying users? What are your thoughts? View my blog post here: http://www.purlem.com/blog/?p=57
It doesn't seem that anybody mentioned this:
If customers are aware of the future price drops (they observe the behavior and learn the pattern, or the manufacturer states it explicitly), then customers who would have paid $40 will wait around a month for the price to drop. So the numerous price drops actually convert higher-paying customers into lower-paying customers.
I'm not saying it won't work... but in the long run the economics of it is shady. I wouldn't run my business this way.
Also, to repeat what others have said: MacOS X 10.6 is really about under-the-hood features. Apple knows that end users won't pay $120 for what they perceive to be a dearth of features. I don't think it has to do with them strategically altering prices.
It's absolutely true. I bought Vista Ultimate (System Builder's Edition) from Newegg. I'm mostly a Linux user, so I only have one physical Windows machine, a desktop for gaming. I use old XP licenses from college for virtual machines.
I bought a Windows 7 Home Premium for $50 while the discount was in effect. After being burned by the waste that was Vista Ultime, I'm not making that mistake again.
Despite this, I can tell you that if Windows 7, full version, were $20, I'd probably buy at least five licenses, doubling the revenues to MS.
The invisible hand only works if merchants actually try to compete in price instead of taking price for granted and competing in all the other areas.
I'm surprised that nobody even mentioned the word COMPETITION.
You are not doing it wrong.
Microsoft/Apple etc exist in an oligopoly. [Apple makes more money from its devices, software just covers the costs]
iPhone Apps? thousands to choose from? Such markets are a good example of intense competition and hence the price.
That also explains why most intangible stuff is free on the internet.
Many companies initially charge a premium (monopoly) to quickly recover money and within an year they reduce the prices to counter competition.
I'm just going to spout of various one-line responses.
You can't have a sale if the game costs 5 dollars in the first place.
If all the customer needs to ask is "why not?" it doesn't motivate us to do a great job.
We still need to make a living and we're not all Valve.
5 dollars is the upper cost of these little phone and web titles and you can't live on 3 dollar sales.
Apple sells hardware, not software.
Chiming in on this late, but one thing to keep in mind is that elasticity of demand is not a linear relationship. Sure, the pedagogical graphs maybe be at best a jagged quadratic, but in the real world you have dozens of variables that control where your sweet spots on the price versus profit equation are, and they change over time.
One of the big ones is context -- $50 is throw-away money on dinner, but a lot to spend on a game, yet how many times do you go out to dinner versus buy games? $20,000 is entry-level pricing for business backup software (not quite "Why not?" but definitely "Really? Fine, just buy it."), but totally insane for personal backup software that does the exact same thing (or probably even less) but no business will "trust" $30 backups. Businesses have a much lower aversion to cost and a much higher aversion to risk.
No one is going to invest $50 in an iPhone app when they only paid $99 or $199 for the phone. The usage fees are probably out of context for most things except services -- ie, if you had some sort of location tracking service that billed $1 a month for giving you a map of everywhere you went. However a $50 app for their desktop computer, which all told rang up for over a $1000 seems like increasing their investment in it.
For people complaining open source is somehow devaluing programmer work, well, that's the "doing it wrong." Think of open source like house-raising parties. It's common infrastructure, and while there will always been room for value-added business, anything infrastructural is almost destined to eventually be forced into either regulated monopoly or communal support unless something is forcibly externalizing costs. (vis a vis why you don't have house raising parties in most Western nations anymore, but probably will again in the not too distant future ... next Sunday AD ... ).
You're right on this approach but in the Microsoft vs Apple operating system prices we're probably not comparing apples with apples... even both companies distribute software, their focusing on making money is different because at least until know they have two different target markets. Apple users are more likely to pay higher prices for hardware and Windows users are more like to pay more for software as Chris (Love) stated before. This applies more to software developers or companies who are not highly popular and doesn't have a high number of loyal users. Apple Store strategy is very smart, because they give the space where to show the software to a huge audience, and they collect 30% of everything sold, it's just brilliant and good for them that they could see how the way software was being sold was wrong.
Agree with the others.
This might increase the sales in the short term. In the long term I think it will have the opposite effect. Customers will expect a lower price or a free product and they will not value the product highly.
We developers undermine ourselves very well. The other day the guy charged me 50 bucks for less than half an hour simple work of cleaning a carpet. Then some geeks spend years of their life for what? For a thank you? It is pathetic. Increase the price. Value your work.
i think the problem with comparing the OS's is that one of those is locked to hardware where, arguably, the price difference is more than made up for.
I liked this article. Your matrix showing the increased sales when reducing price is quite compelling. Like some of the commenters here, I'm wondering if this was stimulated by the perceived drop in price and, therefore, reduction in "risk" to the consumer hence the purchases.
There's a really good book about how we, as humans, don't behave rationally when making purchase decisions but we behave predictbly irrationally:
The Hidden Forces That Shape Our Decisions
book by Dan Ariely
Thanks to Chris Yeh, I'm pasting part of his outline of the book here (saved me from re-reading and taking notes). http://bookoutlines.pbworks.com/Predictably-Irrational
This might offer some additional thoughts as to why people jump on the lower price. It talks about FREE / zero cost but I sense the drop in price creates a similar effect - reduction in loss/risk and the creation of value to the consumer.
Zero/free is a source of irrational excitement. This is called the "zero price effect." Ariely, Shampanier, and Mazar conducted an experiment using Lindt truffles and Hershey's Kisses. When a truffle was $0.15 and a Kiss was $0.01, 73% of subjects chose the truffle and 27% the Kiss When a truffle was $0.14 and a Kiss was free, 69% chose the kiss and 31% the truffle According to standard economic theory, the price reduction shouldn't lead to any behavior change (relative price and expected pleasure should be equal between the two experiments)
The same experiments were conducted with Kisses going for $0.02, $0.01, and free...and free again made a huge difference.
Ariely's theory is that for normal transactions, we consider both upside and downside. But when something is free, we forget about the downside. "Free" makes us perceive what is being offered as immensely more valuable than it really is Humans are loss-averse; when considering a normal purchase, loss-aversion comes into play. But when an item is free, there is no visible possibility of loss.
With desktop software, the biggest sales obstacle is the buyer's desire and ability to find/download/install the product. Definitely not consumer oriented. With iPhone, those obstacles are removed and the remaining obstacle is price. Thus the App Store is exposing software to the broad consumer market, whereas independent desktop software only ever reaches the early adopter market.
I think Microsofts pricing strategy is based largely on the idea of offering deep discounts to the computer makers as an incentive to preload Windows and Office and prevent any consumer or VAR from installing a competing OS like Linux or BSD. Iv'e heard that the OEM copies of Windows 7 may be as low as $38.
Software is not like manufacturing hardware. While both have considerable development costs, the actual manufacturing and distribution costs for software are almost non existant.
By lowering the price of software, it is easier to more than make up the difference on volume, but microsoft has no where to expand in the OS market and prefers to keep it captured. Of course, a lot of the profit from the high-priced upgrades is being squandered on identifying and prosecuting those who don't pay, and on trying to make inroads to force their products on those who don't want it, or on people who don't need it.
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Valve are really the only company trying new ideas on how to sell/fund games.
A couple of weeks back they were looking at how some of there games could be funded by a load of small "investments" by players and in exchange would get the finished game at half price or free depending on how much they paid.
The only problem I could see is alot of annoyed "investors" if the game didnt make it to release.
But at least they are thinking of different ways than the norm
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Great post - completely agree that failure is something to embrace rather than try to avoid at all costs. Once you realise what can be learned from your experience through failure, you learn not to see it as a bad thing at all.
Invariably you end up learning a lot more about what ever it is that you're doing when you experience failure.
Keep in mind the AppStore is a new concept and it would be hard to get people to plunk down $50 for an app, even if it's better than the game they just paid $50 for on Xbox or a PC platform.
Consumers tend to be relatively little software a la carte. They get Office or some similar software bundled on their new PC. Some people by games or specialized applications. But mostly it's business that spends money on expensive software. Expect to see more expensive apps as developers figure out how to use the iPhone platform (perhaps in conjunction with more traditional enterprise infrastructure) to solve important business problems.
This is similar to a fiscal conservative principle - which I believe is true...
Cutting taxes leads to an increase in overall revenue. Why? because taxes are part of the price of doing commerce. Decrease the tax (analogous to price) and you increase the amount of commerce that takes place (analogous to sales). Usually the increase in economic activity more than offsets the initial loss of tax revenue.
Of course, this principle can only go so far - taxes can't be cut to zero.
To the contrary, when the firmware update for the Ipod touch came out, and they priced it at $10, I was outraged. Mainly because it was a trivially minor update, and they were charging for essentially a future-proofing of your device (as apps could come out that required 3.0).
One of the few times I considered pirating a software because of *general principles*.
It was a weird inversion of the normal morality involved in software piracy. But yeah, Apple sucked a fat one on that update.
Your calculations are totally wrong:
$40 - 75% = $10
100 sales is $1000 * 1470% = $14.700 not $58.800.
With a base cost of $3 per transaction you'd make $3700 or
14.700 -( 100 * 1470% * $3)= $10290
So even though you increase sales 14 times your profit only doubles.
It was a weird inversion of the normal morality involved in software piracy.
I think I agree. I work a lot with XML and love Altova's XML Spy and would happy to buy if it was in a price range I could justify as a grad student. The current prices are more than my entire entertainment budget for a month, so I just make do with OSS editors and plug-ins.
I think I agree. I work a lot with XML and love Altova's XML Spy and would happy to buy if it was in a price range I could justify as a grad student.
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This is exactly the pricing strategy that I've tried to use with my poker training site at http://www.grinderschool.com by pricing everything at rates that are 33% or less of what the rest of the market charges.
It hasn't yet led to masses of people joining, but I'm hoping that is only a matter of time once the word gets out more. Your post on every Tech Business venture taking several years to really make a dent is oft in my mind when I consider how far we have (and yet haven't) come in our two years.
Therefore, you can easily reach to a highly targeted people if you are rejser to all posts that you can and finally you will find your business with an optimum flight.
As arjen says a few posts back, your calculations are totally wrong. At 75% discount on $40, you increase sales by 1470% AT THE DISCOUNTED PRICE OF $10. That's 1470*10=$14,700, not 1470*40=$58,800 as you claim. This makes the whole concept as you describe it invalid, as the correct data require a different kind of analysis.
As the charts states, the increase in sale is in real dollars, NOT copies. That is why you have to multiply the original price and not the price of the copy sold.
It's always irritating reading posts and comments like these for the simple fact that they're almost always completely oblivious to any sort of context. The comment by az was the only one that made any sort of reference to reality. The rest are just going off on bizarre hypotheticals, thinly veiled in some pathetic personal agenda. Which is fucking awesome because, like az said, that's what most software pricing is based on.
L4D itself is a quaint example. A multiplayer game (i.e. lucky to have a lifespan longer than 2 months, the value largely supplied by the customers themselves) containing an extremely lame amount of maps? Oh, and it's over STEAM where the cost of packaging and delivery is nothing, and we don't even own our copies in Valve's eyes? Well, that sounds like a good fucking deal at $50. With the PC game industry in particular, the notion of supporting the developers is now synonymous with supporting self-important, ungrateful fuckups who'll demand more and more while delivering less and less, and brow beat YOU for having a sense of entitlement if you make the slightest murmer about it.
It's actually the ultimate irony. The industry will do whatever it must because it can, to steal a line, and cite massive risks as the reason why they go for franchises and other "sure bets". Yet there's no consideration that things have become too expensive and disappointing for the customer to bother with anything other than what THEY perceive to be a sure bet. The less of a risk it is to buy something sight-unseen, the less disincentive there is to do so. And the fact is that with STEAM, and digital distribution in general, there's nothing BUT risk since we can't even pop it up on eBay. Hence, i bought Orange Box when it hit $20 over a year after release. And that's with it including a game i love and want to keep in my library (Portal) and a game i'd been dying to try (TF2).
There are a lot of us who've long since been burned by that sort of risk. We just leave "hardcore gaming" quietly instead of saying anything because we also know that bringing it up on any gaming forum is going to get us labeled as repetitive curmudgrons by every fucking furry faggot there when we dare to interrupt their repetitive teaparty threads.
"It might be risky to generalize from this. Left 4 Dead has a single-player mode and a multiplayer mode. Presumably, a pirated copy can run single-player mode, but cannot run multiplayer mode (too many people using the same keys).
If this assumption is correct (I have not played the game - I am relying on Wikipedia's description), then the thousands of new purchasers might simply be people with pirated versions who've learned to like the game and decided to spend $25 to play online. These people would not have purchased the game on the first day for $25." -- Jonathan Levy
This assumption would suggest a certain boon to sales created by the ability to demo a game. And yet the industry has created yet another self-fulfilling prophecy in not creating demos because chrweuv;reh. I can't type a real word there, because there's no rationale to go with it. It's not even circular logic, it just stops dead after a certain point and the media is too incestuous to dig.
"Excellent comment Mike. The unfortunate thing is that the FOSS movement has convinced an enormous amount of devs that making money from the fruits of your labor is evil. Couple that with greedy executives that stupidly believe that all developers are interchangeable cogs in a machine and can simply be replaced with sweatshop workers with little to no skill and a toxic environment of low quality and expectations begins to set in. It's going to be *very* difficult to reverse the damage they've caused in both developer and consumer expectations about the price of software." -- o.s.
All the FOSS movement has done is foster what i like to call a "post-usability aesthetic" in terms of software design. It's like post-modernism, but for software! Throw off those shackles of progress, people should have to think through 3 drop-down menus and a slider just to draw a fucking rectangle!
Actually, the biggest sense of entitlement always comes from the developers themselves, who tend to conflate how much effort they put into something with how good the end result is, and then make completely erroneous assumptions about how much they deserve to make. Not from the contract, of course. From us. The whiny ones put themselves in the position of being screwed by suits, then they get off on acting like martyrs in a perverse attempt to ignore the fact that they ARE interchangable cogs. In non-game programming at least, the competent ones also tend to be smart enough to not desperately grab the first sweatshop position they can find.
"These high prices will only encourage piracy. On campus there are a lot of hacked Xboxes! I didn't even know one could change the firmware on your 360 to play burnt games." -- Brandon
This is something most people aren't aware of, since in the world of game journalism the best we have are douchebags from MTV who write industry apologetics in the guise of "interviews", failed actors who wish they were movie reviewers, and editors who conveniently find themselves drawn to jobs with publishers in departments they have zero experience in.
Console piracy is just as prevalent, just not where anyone wants to look. Mostly because it'd mean acknowledging a more nuanced set of correlations.
My favorite example is still Poland, where when i checked a couple of years ago, the average income was around USD$14,000 before taxes. This was fairly decent, actually, because the economy there was healthy and the cost of living was low. Now, PC games are, for some reason beyond me, decently priced there, and the piracy rate was not high enough for the IIPA to whine about it in their bullshit reports. Instead they went on about CONSOLE modchips being on the rise, which later made perfect sense to me; at the time of release, the game-only version of Guitar Hero for the 360 was the equivalent of USD$107, and CoD 4 was the equivalent of USD$98.
The sales that Valve is an old thing for traditional retail in xmas sales etc.
During these times prices are always cheap because there is a known increase demand for the products and the short term nature of it increases the sense of urgency in on the fence buyers who weren't sure if they wanted to buy the product but don't want to miss out on the bargain. A lot of these buyers would probably never buy the product if it was offered permanently at the cheaper price, because they know they can get it for cheap any time they want now instead of "get it now or miss out for ever" encouraged by a sale.
It would be interesting to see if valve got the same increased sales performance if the product was not on a short term sale but permanently reduced.
I've spent thousands of dollars over the years on software.
I've bought several releases of Mac OS X, incremental upgrades as well as major. Probably spent a few hundred on iPhone apps.
Yet I've not paid for any Microsoft software since MS-DOS 6.22, despite having 2 PCs at home to complement the Macs.
The pricing for the MS boxed products is just that much over the threshold of what I am willing to pay.
US$200 for the version of the OS I am likely to use? I'll take a pass on that. US$60-100? Yeah, I'd be willing to fork that over.
Most of my MS working career has been spent working for Microsoft Gold partners, so I just use the work licenses, which they're fine with.
I guess the average Joe doesn't notice because they're getting it bundled with their new PC, but those of us who build their PCs are SOL.
So, its off to "That One Network Share No-One Talks About" we go.
"If customers are aware of the future price drops (they observe the behavior and learn the pattern, or the manufacturer states it explicitly), then customers who would have paid $40 will wait around a month for the price to drop. So the numerous price drops actually convert higher-paying customers into lower-paying customers." -- Mark
OH LOOK! Another blatant assumption magically turned into absolute certainty! Haven't seen those before when dealing with this subject, should do wonders. Because you know what? That's what we do. All day. Just sit around infinitely, waiting for the price of things we want to hit their lowest point. It's like "well, i was GOING to keep my life on track by continuing to do things i need to do, but fuck it i'll just wait around a month to save $20 on something i actually need or want now".
Clearly businesses need a way to remove need from the equation, thus sidestepping another natural part of that whole "supply and demand" thing. You know why you were the first one to bring this up? Because you are an awesome mind at business, as is evident by the way you've made it so simple to understand.
This works for consumer software, the lower the price the more people can be convinced to buy. I wonder how well discounting works for really specialized software, the stuff that costs $1000 or more per seat now. Is the addressable market even large enough to reach anywhere near a 1470% sales increase? Can you even get the word out to those people? Also as such software generally relies on ongoing maintenance contracts or regular updates, do you risk souring the customers who already bought the product at its higher price?
Software as a service, with ongoing (but small) fees, avoids most of these questions.
I have to echo rythie's point: the Mac OS X vs Windows 7 comparison is not really valid. While going from Leopard (10.5) to Snow Leopard (10.6) is $29, going from Tiger (10.4) to Leopard is $129. I consider that outside of "heck, why not?" pricing, which is probably why I'm still using Tiger.
Console gaming has brought much greed from the industry. 20 dollar map packs. 60 dollar games (rumors COD MW II might even push that further).
PC gaming I think has it pretty fair. Free Online play, free map packs, 50 dollar games.
Gabe Newell seems to notice. Your L4D example is quite good. It will take a big company like valve to push prices back down to where it should be.
These high prices will only encourage piracy. On campus there are a lot of hacked Xboxes! I didn't even know one could change the firmware on your 360 to play burnt games.