I don't know a lot about economics, but it has some similarities with the Laffer Curve http://en.wikipedia.org/wiki/Laffer_curve .

It would be interesting to see at what point Valve would lose revenue when decreasing price. What is the "sweet spot?"

And with every copy sold, your market has shrunk, as those customers won't be repurchasing (unlike the Laffer Curve and government taxation).

I think something else to consider here, is the 'bargain' effect... I think that the *sale* itself is what drives the huge increase, more than the price itself. In other words, I don't believe Valve would have made as much if they had started at the smaller price from the beginning.

When I go shopping, if I see a new game at $29, I probably won't buy it ($29? must be crap!). However, if I see an older game at $29 down from $99, I'll jump on it ($99? must be great! and I'm saving $70!! buy buy buy)

I tend to agree with Gerald. The sale was success because usually the software costs $40 but *now for limited time, hurry,* for $10.
I have experimented with pricing of my own software and sometimes it seems that the price is not that important as one may think (selling for $10 does not sell twice as much copies as selling for $20). But it probably depend on many factors like competition, market niche etc etc.

I agree with the windows thing. Being a linux kind of guy the only interest I have in windows at the moment is running it in a vm for the annoying times when there's no sensible way to do what you want without windows (eg, itunes).

I've had an old copy of XP for this. I'd kind of like to use vista instead, but it's too damned expensive, and being a geek I want everything, not some artificially hobbled creature. Same goes for win7. Maybe I'll buy a copy at some point, but for now, I'm sticking with my xp disk.

At £30, I'd just pick it up, provided I knew I wasn't going to come across the old 'you can't do that in this version' issue.
The other thing that stops me is, of course, the wondering whether this 90th vm installation is going to activate or not, and whether wga is going to call me a criminal.

Looks like they priced Left 4 Dead correctly, eventually. But in the meantime they managed to get people like you buying it at twice the 'optimal' price.

This is all pretty standard marketing/economics, have a read of 'The Undercover Economist' it'll make you see everything differently.

As long as support costs don't scale in line with sales.

It's true - I spend little or no money each month on music, very occasionally buying an album if it's particularly good. The cost is just too high at around 10UKP per album.

However I had a spate of buying singles and albums from allofmp3.com (the russian download site of dubious legality) at around 10 cents a track, or a dollar or two an album. I was regularly spending 15-20 UKP on music per month. If this had been a legal site where the money was going to the music industry, the industry would have been getting probably 6-9 times more of my cash than they do currently...

Making the software as cheap in the first place would not have resulted in these increased sales.
Tell the buyer the worth of what he is buying first, and then give him the bargain for this jewel!

Ant - yes but they'd have been getting less money from those willing to pay the prices now. The key is figuring out how to make everyone pay as much as they are willing to, this is also the hard part.

I don't think your point applies to Windows. It's not an application, but an operating system, so you basically need one (you own different operating systems, but probably not too many different versions from MS). MS has market share there too close to 100%, so it cannot gain new customers either.

What you describe works well for software which you don't have to own but you have great choice if you want to buy something. If there were a game that everybody would like to own, optimal (from the point of view of profit maximizing firm) pricing would be similar to Windows. If you make just one of many similar games, optimal pricing is different.

W7 upgrade upgrades box version to box version, that you can move to new PC. 10.5 upgraded to 10.6 is still an OEM version, that is good only for existing mac with 10.5, and when this mac dies - it's worthless - newly bought mac will have 10.6 anyway. Afaik this 10.6 upgrade is also only valid for upgrading from 10.5: users of 10.4 (released in 2005) are encouraged to buy $169 "mac box set" instead.

My experiences from the AppStore is that revenue remains constant almost regardless of price. But higher price usually gives more dedicated users and less support (and actually, high ratings). I should say that my app is a niché app with no chance of entering the top 20 list - I think the rules are different for such apps because of the strong exposure for the app in the main top 20.

I don't agree about the comparison between the pricing model of Windows and OS X. Apple produce hardware which they make money on allowing them to sell the OS at a much lower price, Microsoft don't.

One thing you need to take into account is user support. You cannot provide good support for users if you charge $1 for the software. Of course the software may not require support, but the more complex it gets, the more questions from the users will come. With iPhone one thing makes it easier -- there is only one configuration, so most configuraiton-related problems can be eliminated, which sadly cannot be said of Windows.

To be fair, Windows 7 is a whole new version of Windows while Snow Leopard (10.6) has very few new features over the Original Leopard (10.5). And Apple knows it, since they don't usually price their upgrades so cheap.

But i agree, Microsoft should lower his price, even more so considering the zillion options they always have for licenses.

Pricing is a funny thing. If you really want to experience pricing dynamics visit a live auction. Suppose cars. Say the market value for a car is actually $25,000. Auctioneer starts at $5000 approximately 30 hands up. At $7500 15 hands up at $10000 5 hands up at $20,000 only 2 hands at $20 500 the lot is knocked down! Why did the under bidder stopped there? That beats me!

One thing that I have found with cheap software is that it means you don't have to worry about the ridiculous "trial" period. I've bought software before at low prices without even trialing it because at the "what the heck" price point, if the trial doesn't work out, it's not a great loss in investment.

Not having to support trial versions of things would surely make for a decent saving.

From my high school economics, the principle you are describing is elasticity (http://en.wikipedia.org/wiki/Price_elasticity_of_demand).

I admit I buy more software using the App Store then anywhere else. MS makes there money from the different licenses plans they offer, for example Action Pack Subscriptions. The interesting question for me would be how much of Microsoft's upgrades happen via these programs rather then buying retail versions. Consider Apple doesn't have a subscription solution, where is more ony being made? Food for thought.

Off topic: You know your addicted to StackOverflow when you want to upvote the comment's on Jeff's blog.

This seems to assume that a change of operating systems could fall into the category of "impulse purchase". I'm not sure I buy that. (More at .)

I think this largely has to do with the fact that in both the case of the iPhone app store and Steam, you've already got your credit card attached to your account, so purchasing involves a couple of clicks.

For an independent site, you'd need an extremely high value-to-price ratio in order to get people to bother with typing in the credit card info.

There's a post on Fred Wilson's blog about iPhone app prices. Two interesting points:

"Competing with another application solely on price is a sure fire way to go out of business."

"Getting someone to pay anything is hard. Once they've made the decision to pay, the difference between $0.99 and $9.99 isn't as big as many think it is."

http://www.avc.com/a_vc/2008/11/iphone-apps-are.html

Another issue, at least with games, is the time investment. No matter how cheap games are, there is a limited amount of time I have to actually play them. Though I have bought more games than I am able to play through Steam, there is a limit to how many unplayed games I want, even if they cost just $1.

@Gerald, @AT, @Thomas : at least in the case of video games, you have lots of specialized media which give advice on which game is good. They may or may not be dependent on advertisement revenue, so the opinion may be biased somehow. However, take a game like Cyanide's Chaos League. It was sold around 30€ (~ 43$ now, but at the time I think it was also 30$). The game is of high quality, and all video games magazines and websites I know of agree with me. The fact that the price was "fair" (compared to the usual 60€ one has to pay for PC games nowadays) was also highlighted in many reviews. The same holds true for the new "Sam & Max" adventure games, where one could buy "per episode" at a reasonable price, or wait for the game to be "complete" (ie buy all the episodes when they are all out) for a "discount" price.

It is high time that software which has the potential to be truly distributed worldwide, with millions of copies becomes cheaper.

I also agree with Diago : the fact that you just have yo click to get apps on the iPhone clearly helps to buy new apps.

Similarly to what Thomas mentioned; setting the initial price too low will devalue the product - but a high start price and a quickfire limited-time sale will have people forking out in order to take advantage of a "good deal."

Something that seems to be becoming more popular (although not so much here in the UK) are rebates. Using a rebate scheme, the retailer maintains the full price of the product (thereby maintaining a high perceived value) but at the same time offers the customer the perception of a good deal (and an incentive to buy).

I'm not sure how a rebate scheme could be applied to software (especially digital distribution) but it's an interesting thought.

I'm with codeburns; I'd like to also hear about how their support costs changed too; increased user volume implies that you need to beef up your support infrastructure by an appropriately proportional level.

The lower price point may decrease the quality of incoming support requests too; you went down below the "why not" level on price, seems reasonable that the same might apply to "why not just ask support about this?". This could affect the skill distribution required across your support team.

I'm just speculating; would be good if someone correlated those numbers with the sales figures.

The Mac OS X vs. Windows 7 argument is really an apples vs. oranges [no pun intended] comparison as "no name" points out. Also version of 10.5.4 (which I presume is a update from other versions) costs $129 which blows the argument out of the water. Mac OS X only runs on Apple hardware which has a high profit margin - wake me up when Apple offers it for PCs at that price.

Personally I get updates every 6 months to my Ubuntu and they are free, so both prices seem pretty high.

The real problem with the App store on the iPhone, is you have to decide to pay for something before know if it is any good (which is the same in general with software). Given how locked down the iPhone is, Apple could have a better model. Why not have trial period of a week? where I get prompted at the end if I want to pay or de-install, and your not allowed to re-trial (Apple would keep a record).

It'd be interesting to see the sales statistics from a couple of weeks after being on sale. Do the sales drop because those who wanted the game already bought it while it was on sale? Do they increase from getting more exposure?

I think the "heck - why not?" principle maybe applies mostly to fun software. As nobody really needs it of course there's going to be a massive sales drop-off as the price goes up. But with important, practical, boring software there's going to be a far higher percentage of buyers who would've bought it even at the higher price.

I purchased the Windows 7 upgrade during the pre-order sale timeframe, don't even remember the price (it was that "why not?" pricepoint) - think it was $49.99 - 59.99.

Not only is Windows 7 a great OS based on my beta experience (it's been my primary OS since Microsoft released the beta) but the price was so trivial. It's not worth going through the hassle of finding a copy of questionable legality and worrying about patches, software that needs Windows verification.

"...the iPhone App Store has never made that easier"? Shouldn't that be "has made that easier than ever"? I'm not a native speaker, so perhaps that's an idiom I'm not aware of.

$120 for a Windows Home upgrade is simply thoughtless, especially considering that more and more people use multiple computers.

I still find it ironic that Gabe Newell tells everyone that lower prices mean higher profits, yet since the end of last year european customers got a 40%+ price increase when all dollar prices where converted 1:1 to euro prices. There are games that are almost 100% more expensive compared to the US!

Jeff, in theory you are totally right. The lower the price, the more people will buy and the more people will buy instead of making an illegal copy. The quantity will soon compensate for the lower price, so if you sum it all up, you are making more money even though the price is lower.

So far so well. In theory practice and theory are the same... but in practice they are not! And to quote one of your last sentences:

"But for software sold in high volumes to a large audience, I believe they might."

High volumes and large audience are the keywords! What you use here as samples are product that a wide range of customers may need or just would like to have (if they really need it is another question). Of course the customer base for every product is somehow limited, however the gamer community is gigantic (that is like a 64 Bit Int is limited, but how often has anyone of us seen a 64 Bit overflowing?). So cheaper price leads to more sales and even cheaper price price leads to even more sales and so on.

What if the customer base is much more limited? What if you sell a product that only 10'000 people in the whole world will ever need or like to have? You sell your product for $35 and you sell 6'000 copies. Not bad. You could sell it for $30 and maybe sell 9'000 copies. And if you sell it for $25 you sell 10'000 copies and your customer base is satisfied. If you had sold it for $10, you also had just sold 10'000 copies, as the potential customer base won't grow just because the price shrinks. See where I'm going?

The potential customer base is fixed before you start selling your first copy. The price only affects the real customer base, however it should be very obvious that the real customer base cannot grow beyond the potential customer base no matter how cheap you choose the price. And selling 10'000 copies for $10 or selling 10'000 copies for $25 makes a "tiny" difference (or maybe not so tiny, as a sales manager this difference will get you fired).

Sales/Marketing/Business theory tells us there is a peak. If you paint it as a graph, you have a price decreasing on the X-axis (you start at the highest price you can think of that is still realistic and decrease the price as the X-axis goes to the right). The Y-axis is the amount of $$$ you'll earn (not the amount of copies you sell, as of course a product you sell for $0.01 may sell more copies than one you sell for $5, but will it really make more money just because of the higher quantity? I don't think so).

I'm not sure how this graph will look like, but I just guess it will look similar to a bell-graph (as most real life graphs look like one). E.g.
http://www.ericsink.com/bell.gif

The further the price decrease, the more copies you sell and in the beginning the quantity compensates the lower price, so the overall incoming raises, first slowly, but increasingly fast as the price drops. This continues until we get close to the peak. Now all of a sudden the growth flattens and flattens and then we reach the peak. This is the optimal price for the product! All software should be sold at that price (which is different for every peak of software of course). If you go beyond the peak the incoming will drop. Why? The quantities still go up, but meanwhile the price is so low that even the slightly higher quantities cannot compensate it any longer.

Every sales guy knows this theory. Every sales guy is doing a better job the closer he can get to the peak without staying to far on the left or right side of it. Then why does it look like some products are so horribly far away of the peak? Windows upgrades e.g.? I don't know. Maybe Microsoft should just fire their sales manager and hire someone who is not a moron. Lets face it, there are good programmers and there are horrible programmers - same applies to sales managers.

Definitely right on the MS pricing. I don't ever upgrade my MS OS due to the pricing (even though my machines are capable). The only time I get a new version is when I'm forced to with a new machine. Drop that pricing down to around $50 and I would upgrade each time.

Not to mention that steam "sales" in Europe are still higher compared to retail in Europe.

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.

"Getting someone to pay anything is hard. Once they've made the decision to pay, the difference between $0.99 and $9.99 isn't as big as many think it is."
In principle, I have to agree. But in practice, it couldn't be further from the truth. For the sake of the argument, lets use "99c" and

See, if I know something is "99c", I'll take a look at it. If it's "$9.99" and I have no interest I couldn't be bothered. And that's the underpinning problem of price. It's not that an item WAS $40 and is now $10. It's that I put the value of $10 in the category of "I don't mind looking"; while $40 is "forget about it".

Buying a $40 item just because it's $10 is faulty economy at it's best; and outside of women rabidly savaging the after-xmas sales shops, I can't see someone buying something they don't want regardless of price.

You have to wonder if the people are buying at the lower price from valve because they thought they were getting a bargin. The more the bargin the more sales.

I think the app store pricing is crap, spam applications are to blame, because these have bought the average price down.

I can't believe no-one linked here: http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html

Off-topic: The captcha actually asks for the ½ character, how am I supposed to type it? Well obviously I managed, but still...

This has been coined as "peggling". There's a very interesting article on the topic here: http://www.tuaw.com/2009/07/30/updating-doesnt-help-your-iphone-app-but-price-drops-do/

Also of note is that Electronic Arts now has an entire department devoted to making 0.99 iPhone games

Wow .. people buy more of something produced as a premium product (in the case of a AAA game - costing them many tens of millions to produce) when it's offered later at a sale discount ....

what an astonishing insight O_o

why has no one in sales ever considered this option before ....

oh wait

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.

Do you think that cheap software devalues the work of software developers?

Microsoft are at or even past their saturation point and need new growth opportunities. They have a huge untapped market of people running pirated copies of Windows. The are people familiar with the product and have stuck with it but don't like the price. I'm sure that lowering their price is the best strategy for converting these holdouts.

They've already broken sales records with their presale numbers for Windows 7, helped largely by the half price offers. I'm sure they'd see even better numbers once the product is officially released.

I think increasing the profit by discount is valid only for software products which are usable for many people, such as operating systems, games, portable device software etc.

I am developing industrial automation software, they are tailor made applications and special for only my customers. I should bankrupt if I make discount.

Must be easy to install. No extra customers will be attracted by "why not" prices if the installation is "why bother" difficult.

What are we doing wrong? I've said this over and over - we are our own worst enemies. Its no wonder that corporate America treats programmers like second-rate citizens. They demand/expect that we work overtime nights and weekends without pay. They demand/expect that we produce work in their absurd time schedules. They demand/expect that the sort of work that we do MUST be produced in a cubicle between 9am and 5pm and boy oh boy, they'll give you lunch time but make you pay for it if you actually take it. No, its not like that everywhere but its certainly bad like that to some degree or another.

Second, we allowed corporate America to outsource our work to other nations like they did the textile and other industries. We allowed ourselves to standby and watch it happen. Do you want to compete with a $12/hr programmer in India? No, neither will I. I'd sooner work at Borders and have 1/10th the level of stress for that pay.

We also allowed ourselves to give away our work. We did "projects" for friends and family for nothing. It has gotten to the point where people expect us to do this stuff for next to nothing. Can you imagine asking a plumber to come fix your burst pipe at 2am and then telling him you expected him to fix it for nothing because "thats your job"? What about electricians or lawyers, etc.. Imagine assuming that they'll just do their professional work for little to no pay. Yes - there are pro-bono attorneys out there but they also charge for 99% of their work too. They dont allow their industry to get outsourced to India and Estonia where the work comes back crappy for $12/hr just so some CEO can pocket more profit and not pay taxes on the workers here. And our individual states wonder why there is a revenue shortfall?

The problem is US. WE are the problem and until we stop giving away our work and our expertise for nothing, or next to nothing, we will never be taken seriously by anyone. Not the customers and not the executives in those skyscrapers.

As far as the App Store goes, when I develop my app it will sell for about $19.99 or maybe $24.99 - depending. Heck if I am going to give it away for free or less than $3 because "thats whats expected", etc. My position is that if you can afford an iPhone AND its minimum $80+/mth service plan, then you can afford my $20 software. I worked hard to produce it and I am not giving in.

The killer thing here is that, at least in the case of software, the price eventually drops to "why not" levels. How much did Half-Life 2 cost when it came out? $59.99? How much can you buy it for now? $19.99. And that's not any kind of sale, that's the retail price. Gamers, it seems, are willing to pay more just to satisfy their instant gratification need. I wonder if this is brought on by playing the games themselves or if gamers were just indulged more as children and don't have any patience?

[note: the bottom three rows (for 25%, 50% and 75% discount) do not show the total sales amounts as they do not include the original $4000 but only the increased sales]

I think that you are not considering the fact that some things must be *supported* after the sale. I bet that IPhone applications are largely unsopported. This is clearly unacceptable for an OS. And the cost for supporting something goes higher the more things you put in the package.

It is a hidden truth that you buy the software - and are at the same time financing a proportionate piece of the structure that made it. Very small structure for small "compact" applications. Extremely large structure for Windows.

And yes, in the Redmond case this means you are also giving money to lawyers :)

There are from my point of view three prices for software

Free : No hassle, try it and if it is good use it
Cheap : Hassle to pay for, and it is probably outdated now or rubbish
Expensive : Probably good, and if not I can complain...

The problem is that Windows is currently in my Expensive category, but I cannot complain (or I can but nothing will happen)

The only software I buy is in the Expensive category and the only time I pirate it is to see if it worth buying and there is no demo/trial version

I think the Snow Leopard to Windows 7 comparison is appropriate.

http://en.wikipedia.org/wiki/Windows_7#New_and_changed_features

This is pretty much like Snow Leopard. No major changes. Just a lot of improvements and some revisions.

With Tiger -> Loepard we got several largeish features: Time Machine, Quick Look, a much better synthesised voice, Spaces, Boot Camp. Which is on par with XP -> Vista. At least from an end user perspective.

I completely agree, this would probably also cut down on piracy.

Another potential for windows is very cheap for home users and maybe a higher price for business users.

@Mike - Good luck selling a dozen copies.

I agree, and I think Microsoft do too. This is why they did a pre-SALE of Windows 7. At $49 it hits that sweet spot.

Hell at $49 I nearly ordered it for my iMac!

So why didn't they keep it at that price?

My guess would be that it would mean lowering it for Dell, HP etc. who don't have a "Why Not?" price-point (as they are corporations) and HAVE to buy it.

The first sale "sold out" (not sure how pre-order software sells out must be marketing). But I would bet that further sales are done - possibly closer to, or after launch date.

-Perros-

Why doesn't someone do a test with this? Someone big like EA, with a game that people want.

When the game comes out, it comes out at $50. BUT! You put up signs everywhere saying "Every two months the price is going to drop $3." That way, everyone can decide up front what their price point vs. available time is worth. "Well, I'd rather save a bit, but fall semester starts in 3 months, so if I wait until the price drop I won't have as much time to play..."

All kinds of factors will come into play - original release date, when your friends want to buy it, etc. And it's certainly possible that you'd be willing to be a first-day buyer for one game on this scale, and wait 6 months for a similar game, just due to your circumstances.

Still, I think it'd be fun to see. Plus, every two months, it's front and center in the stores again. "Now on sale!" (And it would solve the problem of an 8-month-old game that still retails for $50, and me saying "I'm still not buying it at that price.")

I couldn't agree more with this article. It is 'right on.'

I have several Macintosh programs that I love and use all the time. For example, 1Password (a killer password manager that sells for $39), Quickeys (for automation), SuperDuper (for backups), and MailPlane (Gmail client). These are all great softwares with super reviews. But they're just too expensive for an impulse buy.

When a prospective buyer reads about them they do sound good. But so do hundreds of other applications with similar limited purpose. You just don't want to buy (can't afford) hundreds of apps in the $20 to $80 price range. So you're going to take a pass on most of them and you'll never know how they might have improved your user experience.

Free 30 day trials are not the answer because there is a learning curve for most software. I've downloaded quite a few applications with the intention of putting them through their paces only to have them expire before I got around to investing sufficient time.

I think software demand is highly price elastic. The App Store for iPhone pretty much proves that point.

People only have so much disposable cash, and when it comes to buying software, you are buying blind (most of the time), meaning you really don't know if you need it, want it, it's it will fill all your needs, if it's easy to use, and most importantly the one you actually want.

Especially things like games, some free games are really fun, some 50 dollar games are really a huge waste of money, but you don't know until you've played them. If you ask me 50 bucks is way too much for any game, it's a game, sure you can argue you got your money's worth but I guess that depends on how you tally up your time/money/entertainment value.

I could go on for a long time on how I think game software is totally off base, especially with the idea that a game has a shelf life, people are still buying monopoly, fun is fun, no time limit on that. But that's a different argument.

I agree with people getting paid for their work, I just argue what is reasonable. To me it's more then obvious if companies like Microsoft are making billions and billions every year, there's a really good chance they are over charging. Then to ease their guilt they become philanthropists and give back about 1-5% (which has wonderful tax implications for them) and they become heroes. I'm going off on another tangent again.

Back to small apps, especially for phones, you have a phone for about 2 years, how many times are you really going to use most apps in two years, and then you get a new phone, buy new apps or the same one again, which by the way is another huge issue of mine, I don't mind paying once, the second time I resent.

Bottom line, I think most people don't realize the value of most things, unless of course you are swimming in cash and then id doesn't matter so much.

Everyone wants to think that they should make millions every time they create something, but could you image if everything you bought in life was 50 bucks? I think because the software business is still (relatively) young people don't have a clue what a fair price is and Joe consumer is going wonder where all his retirement money went to.

You are completely right, I think the same.
And I'm also happy to see that you're fond of Valve softwares, and their policies. I completely agree with them. Moreover, they produce valuable software - ie. whenever I buy a software from Valve, I know it's worth the price. :)

This is what we economists call the price Elasticity of Demand.
http://en.wikipedia.org/wiki/Price_elasticity_of_demand

Don't forget market saturation. If you sell your software at a discount, you may increase the sales during that period, but overall decrease the amount of profit made over the life of the product.

Microsoft has to charge that much because of its support costs. OS X costs less to support, games even less, iPhone apps even less. Of course you could go a la carte like the airlines and sell a discounted version with pay-as-you-go support.

This really isn't a revelation. Look back at Turbo Pascal pricing in the early 80s. Anders was convinced that Phillipe was either crazy or crooked to price his compiler so cheaply ($99). But Anders soon realized that volume trumps per-unit profit.

With Windows 7, I was VERY close to pre-ordering - it was available for £49.99 here. Unfortunately, it was out of stock, and by the time it came back in, it had gone up to (I think) £79.99. That did 2 things

1) Cross my barrier-price for this type of software (my barrier price for a game is FAR lower)
2) Made me think I was getting ripped off (it was £30 cheaper yesterday)

End result was that I didn't buy.

Now, if I could've bought a digital download of Win7, Microsoft would have my £50 with no real distribution cost, and I'd be happy.

Apple, on the other hand, have done very well with Snow Leopard pricing.

Jeff have you heard of Chris Anderson's newb ook "Free"? It talks about how everything that is digital is going to become free sooner or later. I think you'll find it pretty insigghful regarding this issue.

You can listen to it here ( for free :) ):

http://www.wired.com/techbiz/it/magazine/17-07/mf_freer

I think there is an exponential wall buyers build as price increases:

$1 = line of morter
$10 = speed bump
$100 = 6' wall
$1000 = large stone buildings with guards (in which happens budgetary analysis with the actuaries)

A small difference, depending where it is on the curve, could represent a massive increase in buying friction as I try to figure out if the software is really worth it. Often, the effort isn't worth the effort; high priced software is usually also bundled with obfuscated brochure-ware instead of actual, you know, feature documentation or trials. Combine the two and it's a death knell.

I wish my company wasn't in the budgetary analysis pricing category. That market is not big and it is not buying new in this economy.

@Scott
"The killer thing here is that, at least in the case of software, the price eventually drops to "why not" levels. How much did Half-Life 2 cost when it came out? $59.99? How much can you buy it for now? $19.99. And that's not any kind of sale, that's the retail price. Gamers, it seems, are willing to pay more just to satisfy their instant gratification need. I wonder if this is brought on by playing the games themselves or if gamers were just indulged more as children and don't have any patience?"

Not only can you buy HL2 for $19.99, but for $10 more you can buy the Orange Box which also includes HL2: Episode 1, HL2: Episode 2, Portal, and Team Fortress 2.

In fact, it'd be pretty stupid to buy HL2 alone these days.

Hehe, it's more or less the same with taxes.... of course to some point :)

Golly, I wish I could run a successful shrinkwrap software business and be entirely ignorant of/feign ignorance of the high school economics concept called "market price".

@Jamie:
"With Windows 7, I was VERY close to pre-ordering - it was available for £49.99 here. Unfortunately, it was out of stock, and by the time it came back in, it had gone up to (I think) £79.99."

I'm wearing my Captain Obvious hat here, but it sounds like they were scamming you, as it's impossible to have a pre-order that's out of stock...

As mentioned by some other commenters, this exponential friction curve also has a complexity component.

At a dollar, how complicated can it be? Quick value add. Sold.

At $1000 per, uhm... Wait. What? Run down your pricing for me one more time. Your *pricing* is how complex? Yeah. I don't have time to deal with this.

@David Small: Software doesnt have a plural. Its not "softwares". I also see many others write or say "the codes" when speaking about their code. Its code. Thats it. No "s" on the end of these words.

"I don't have time to deal with this." -- this is the problem with the world today. No one has time to use their brains anymore. I attribute most of today's problems with the allowance of the Right-On-Red laws. Once we were given the opportunity to make a right turn on red AFTER STOP, we as a society became more and more "I don't have time to deal with this." types. This is sad. Take time to use your brains people.

There is an interesting parallel between pricing and programming; anyone can do either one with almost no knowledge or training. Pricing is just assigning a number to something. Writing a "Hello world" program involves reading a half page of a tutorial. This low barrier to entry can fool people into not realizing the depth and richness of both disciplines.

If a programmer is going to set prices (or better yet develop a pricing strategy) then he/she should invest at least as much energy into learning about pricing as learning about a programming concept or topic. For starters, I recommend "The strategy and tactics of pricing" by Nagle.

While you are waiting for your copy of this book, I will give you the most basic idea about pricing - try to look at your product and price from the customer's point of view. The customer sees your product and price side-by-side with lots of other alternatives (including not buying anything). Within this context, why would a customer buy your product?

Note that most customers do not care all that much about how hard you worked to make the product or what your hourly wage "should" be. If you want a high hourly wage, you are more likely to get it by reducing your hours (i.e. not investing a lot of time in functionality that customers do not care about) than by increasing your price.

You're completely right, but it has been done before.

Quicken's price, when it first came out, was about $40, with discounts in the big-box stores down to $20-30. It was included with a lot of machines, packaged with a lot of stuff.

People's attitude about copying it? Eventually, they would buy a legal copy to have the manual, support, and patches.

WordPerfect would support their product, in the 80's, regardless of whether you bought it or not. Eventually, they reasoned, you'd buy the product somehow.

WP had a good long run; Quicken's still going.

At the time, Microsoft was selling its Office products under the other model: assume theft and charge a lot to compensate.

----

Where have we seen this battle before? VHS tapes priced at $40-80/tape, and DVDs priced at $10-25/disk. During the beginning of DVDs, did you see anyone making copies for their library? Nope. They just bought the disks.

"Inexpensive" does not mean that you give up the profit line for the business model.

Jeff, this is true for consumer software. Probably also for SMB's who spend money like it's their own. However, "What the hell pricing" would be unwise if you sell software into companies with 100+ people.

Also, things are about to change in iPhoneland with 3.0's support for micropayments. It will be interesting to see if consumers go along or react by feeling nickeled and dimed.

A bit about this and the driving force pulling pricing down is actually discussed in Chris Anderson's Free. Very good book (almost done with it). And you can even get it free from audible and somewhere there is a legally free pdf copy.

"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. "

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.

"The problem is US. WE are the problem and until we stop giving away our work and our expertise for nothing, or next to nothing, we will never be taken seriously by anyone. Not the customers and not the executives in those skyscrapers.

As far as the App Store goes, when I develop my app it will sell for about $19.99 or maybe $24.99 - depending. Heck if I am going to give it away for free or less than $3 because "thats whats expected", etc. My position is that if you can afford an iPhone AND its minimum $80+/mth service plan, then you can afford my $20 software. I worked hard to produce it and I am not giving in.
Mike on August 6, 2009 5:21 AM"

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.

Haven't seen it posted yet but Valve does rip us Europeans of!

I like their weekend deals but their €1 == $1 scheme makes me pissed at them. We're paying 40% more for our games? That alone is a reason to not buy from steam. Their regular games are thus overpriced a lot. It's almost always better to buy the game in a retail store. They don't have to make a cd, manual, distribute the cd. They don't have to give the shopkeeper their percentage. Why isn't it cheaper?

And not all of their weekend deals are great. This weekend dawn of war 2 was on it for half price: €25. It's been available on play.com for €15 for months, without price reduction.

The other part of the iPod-app pricing is this -- it's very easy to get things through their portal ("iTunes") and pretty tough for the average non-techie to get apps in other ways. Controlling the delivery AND having the pricing model, has been a one-two punch that has made [some] people call 'iTunes' the official 'killer app' that everyone was looking for.

I'm excited about Windows 7 and would pay to upgrade. But for $119, I have to wonder if it makes more sense to sell this laptop on ebay and just upgrade to another one that comes with 7.

Also, any hardware or software upgrade to an existing computer has to be ballanced against the inevitable upgrade of the whole machine. I'm going to have Windows 7 one day. It's just a question of when, and I'm not impatient enough to spend $119 on it.

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.

Looks like pricing at 10% (4.99$) would bring a 2800% sales increase.

I wonder how the piracy rates compare for the price changes, most software is pirated up to 90%.

My own data point:

I bought my mom an ipod touch. After she had played with it for a week or two on her own, I was recommending apps to her, cautiously recommending a few non-free apps. My mom shops around, buys the generic brand, and usually won't make a purchase without some sort of discount or coupon. But $2.99 games she'd never played before? "Sure! Throw 'em on!", she said.

As a consumer I'm more interested in how I can take advantage of this. And sure am glad of my decision many years ago of never again buying a game the day it is launched.

If I buy Left4Dead today or in 3 months will make absolutely 0 difference on my enjoyment of the game. But will do wonders to my wallet, I may even get new maps or a sweet gold edition and I will not have to go through all the bugs of earlier versions.

I religiously stay away from the "bargain bin" sections... If a game is priced at $5, it's usually that price for a good reason (unless it happens to be a very well known name brand).

There's frequently discussion of this on the Business of Software forums over at Joel Spolsky's site: http://discuss.joelonsoftware.com/?biz

As several people in the comment thread here have pointed out, using the effects of a sale to decide on a price-point for normal use is comparing apples with oranges. An example from my own company: back in April we did a "one-day discount" offer -- 63% off for one day only. We did more business in that day than in the average month. Later on, we tried dropping our prices by 50% without an annoucement and with no time limit. We kept the prices down for just over a month, and discovered that our sales had dropped slightly *in total numbers of product sold*. So now we're back up to $199/copy; we figure that it was the "one day only" rather than the lower price that was driving the sales.

At the end of the day, all you can really do is come up with theories about good price points and then test them, one by one, in the market.

Of course, a combination of higher prices with carefully-planned discounts can be very effective. On which note, as a reward for anyone who's read this far, for the next two days you can get Resolver One (link from my name below) at half price by using the coupon code "CODINGHORROR" :-) I'll post another comment here next week to tell everyone how that works out...

First, people are not infinitely rich, so they only have so much money to buy all the OSes, hardware, and software that they need. Price a non-trivial item too high and it will be pirated (i.e. most games) instead. Other items you can price high because of support commitments or product scope. There's nothing earth-shattering at pricing most games lower and keeping OS prices above them.

Second, the basic premise is correct. Price something low enough and people will buy it just for grins. I call this the principle of the crack dealer. How do crack dealers get their audience? Sell it to newbies cheap or give it away and then slowly increase prices after that because people are hooked. I think app developers would go a long way in getting and keeping audience share if they approached it that way, as long as they didn't really put the screws to the customers, of course.

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.

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)

>>>Software Pricing: Are We Doing It Wrong?

Yes, see StackExchange!!!! http://stackexchange.com/

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.

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.

Maybe software (with the App Store being the poster child) will soon be faced with the same problem that hardware and bandwidth currently have: prices approaching zero. Simply increasing volume with deep discounts will not work if the price is too low. A major paradigm shift in the business model for selling software will have to occur.

Chris Anderson covers all of this well in his book 'Free' (http://www.amazon.com/Free-Future-Radical-Chris-Anderson/dp/1401322905/ref=sr_1_1?ie=UTF8&s=books&qid=1249586583&sr=8-1). The psychology of Free and how you can make money with Free are intriguing topics.

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.

Microsoft do not want you to buy retail copies of Windows. Their money comes from OEM including the OS with new machines (or even if the OEM doesn't include the OS - they still pay)

If MS offered cheap retail pricing people wouldn't buy new hardware, that's why it's cheaper to buy a whole new machine than upgrade from XP to Vista - and why OEM copies can't be upgraded.

It's rather ironic that the MS model is driven by the demands of the hardware makers, while Apple's (who is a hardware maker) isn't.

It looks like the example math might be wrong. When you calculate for the 10% discount value, the solution is 4000 (base price) multipled by the 35% increaser value, or 1.35 scaler (or 1+(35%)/100). With this you get Atwood's value of 5400. However, if you continue this equation (using 1+(%)/100 as the scalar), the numbers are as follows:

10%: 5400
25%: 13800
50%: 16800
75%: 62800

If you continue the calculations to answer the question: "how many people bought the software?", you get:

10%: 150
25%: 460
50%: 840
75%: 6280

WOW!!! It looked like a simple exponential curve until you get the astronomical increase of 747.6% buyers! If this data is as accurate as it sounds (and it would still surprise), then I would expect 75% discount to be very close to that soft-spot of maximum revenue.

It's the same with PocketPC and have been so for years. You can't charge more than 10-20 bucks.

One idea is to sell 30 levels at a time for $10. So if the game is 120 levels you'll get it for $40. That way you can evaluate the game and if you enjoy you don't mind paying ten more dollars for a week of fun.

Don't forget that there is a "cost" associated with each sale! You might make more money and more sales, but you'll also end up with a lower profit per customer, and someone has to support all those customers.

One of the reasons Apple computers are "premium" is that Apple is interested in customer service. Ask people who've been to the Genius Bar at Apple how's the service. Ask people who've used phone service. Generally, Apple has the best customer support. Dell and HP sell more systems, but they can't give users the same customer support.

By the way, the "Apple" upgrade is only for people who bought the last OS for $125 or got a computer in the last year. Normally, Apple charges $125 for upgrades, but this time, Apple wants users to exchange Leopard for Snow Leopard and priced it accordingly.

Microsoft, on the other hand, has no reason to get Vista customers to upgrade to Win7. Vista is a pretty modern OS with almost all of the basic core security features of Win7. Now, Microsoft would like WinXP to go away, but they can't offer a discount for a WinXP->Win7 upgrade, but not a Vista->Win7 upgrade. Besides, to upgrade from WinXP to Win7 involves getting new hardware.

but FREE IS FREE!!! I would rather don't pay any money at all because I'm a really parsimonious bastard. That's why I like FREE SOFTWARE!!! It's like a nice hippie-collective where there's everyone sharing flowers, rainbows and software. And it's like FREE BEER too!! No one says NO TO free beer!!!

@David W - on the other hand, if your product has a modest monthly subscription too, suddenly you've got 6180 extra customers paying that...

I've spent more on iPhone software in one year than in the past 12 years of Mac usage total.

How can someone define right or wrong here?

An observation:
If Valve did it as a "sale" meaning they advertised it as a temporary discount from the original price, then it's possible that the 50% and 75% percent quantities got a boost from the "what a great deal" factor which you wouldn't get from a flat lower price.

Price differentiation maximises profits by providing the software to a person at the maximum price they are willing to pay. Companies do this by offerring a high starting price and then offerring a discounted price later in time.

I guess the point here is that the initial price is too high so the profit takes too much time to be realised.

Do you guys think any MicroISV's are making money at .99 cents an app. Please.

Brahahaha.. Just saw this from the comments in Jeff's blog on July 25th. Its sounds about right.

Most of those people putting apps on sale are trying to recoup anything - yes anything - please anything, and I swear I'll never have dreams about selling 80,000 units at .99 cents again.

Hahahhaaha..

EA may sell a few copies of Scrabble, but the vast majority of iPhone app developers better be doing it so they can put it on their resume.

---

I heard iPhone app development works like this:

1. Spend six months learning the ropes and excitedly developing a game
2. Put your game up on the iPhone store for 99c
3. Wonder why your app sales didn't even cover the cost of buying an iPhone, let alone six months' salary

Confirm/Deny?

Jonathan Drain | D20 Source on June 25, 2009 9:24 PM

Wouldnt be surprised if lowering the price will help with the ratings too. Youd be less miffed if you paid 25$ for the game than if you paid 60$ or in my case 85$ for it. If it was me id be more tolerant of its faults and errors and would be more inclined to give it a fairer rating if i find the product to be priced accordingly (cheap).

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.

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.

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.

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.

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.

I think your view is distorted by the type of the software you are looking at. Why not sell it for free and make it up on profits is my take: http://devcomponents.com/blog/?p=350

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 :)

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.

@alwin
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

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.

@Philip

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.

+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.

@Mike

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.

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.

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.

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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.

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).

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.

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.

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?

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.

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

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.

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.

"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.

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.

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.

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.

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 ... ).

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 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:

Predictably Irrational
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.

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.

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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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.

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

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.

It was a weird inversion of the normal morality involved in software piracy.

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.

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.