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Are software prices declining?

It's my feeling that the whole pricing structure of software is under pressure." Raymond Strong, senior systems analyst, Westinghouse Electric Corp. (quoted in Computerworld) Sorry, Ray, it's not that simple. True, there's been a proliferation of bargain-basement software promotions lately, and it's tempting (especially for end users) to conclude that software prices are destined to march steadily downward in lockstep with plunging hardware prices. But the real trend in software pricing is more complicated: What the industry is seeing is the emergence of channel-specific pricing models. In fact, it's possible to argue that software buyers (at least those who buy through traditional retail channels) are actually paying higher prices than ever before. Very quietly, many developers--especially those with dominant market shares--have boosted the list prices of their new versions, network packs, and upgrades. Thus, dbase IV now carries a $795 sticker price (up from $695 for dbase III+), the 3.x series and Windows versions of 1-2-3 now cost $595 (versus $495 for the 2.x series), and Borland just bumped up the price of a Paradox LAN node by 50% (from $200 to $295). At the same time, we've also seen a broad movement among large software companies to shrink reseller discounts (typically to about 40%-45% off list) and to cut back on end-of-quarter blowout sales. The result: The discounted street price for a mainstream product like 1-2-3, which used to sell for about $320, is now roughly $100 higher than it used to be. Clearly, these higher retail prices aren't scaring away software buyers. In fact, as Central Point discovered when it raised the price of PC Tools Soft-letter, 8/20/90), a higher price often seems to help sales by positioning a product as a high-value market leader. Which raises a new question: If buyers aren't turned off by higher software prices, why are so many direct marketing campaigns based on aggressive price offers? These days, just about anyone who qualifies for a zip code is likely to get blitzed with direct mail software promotions and competitive upgrade offers at prices that may be 70%-80% off list-- conspicuously lower than the best deals that the retail channel can offer. Moreover, almost everyone seems to be jumping on the direct-response bandwagon; even small companies are dropping literally millions of pieces of mail a year and rewriting their ad campaigns to emphasize direct-response coupons and 800 numbers. The explanation, we believe, is that the software industry is beginning to acquire two primary sales channels--retail and direct--each of which has developed its own pricing dynamics and customer focus. The direct channel, which has its roots in traditional direct mail upgrade offers, chiefly serves individual users, almost always through single-unit cash or credit card sales. The retail channel, by comparison, has become most efficient at handling multi-unit sales to a small universe of corporate customers, who almost always operate within a framework of formal purchase order systems and rigid vendor qualification rules. The fact is, the direct channel's price promotions tend to be irrelevant to corporate buyers. It's rare that a direct-response offer permits customers to buy multiple copies, pay with purchase orders, or get the kind of special treatment that Fortune 500 customers expect. To get the necessary hand-holding and paperwork shuffling (which may be the retail channel's greatest "value-added" service) corporate buyers are usually willing to pay a price much higher than they would as individual customers. Not surprisingly, retailers haven't yet grasped the notion that direct response offers don't compete for corporate customers (except perhaps for single-copy walk-in buyers, who are the channel's least profitable customers). In fact, most of the evidence we've seen suggests that dealers actually benefit from direct response offers. Typically, dealer sales double or triple--at regular retail prices--as soon as a major direct campaign hits the mails. When a prospect is ready to buy, convenience is often a lot more critical than price. Channel-specific pricing, incidentally, is a common phenomenon in the rest of the consumer marketplace. But consumer marketers tend to go one step further: They create distinct versions of their products for individual channels. Thus, Polaroid's OneStep camera showed up in mass merchandisers at a substantially lower price than it did in camera stores--but the higher-priced version was packaged differently and included a leather carrying case, so camera store customers didn't make head-to-head price comparisons. (Lotus seems to be heading in this direction with its various incarnations of 1-2-3, which now include a $50 academic edition, a $220 Tandy version, and a $699 Hewlett-Packard palmtop hardware bundle.) We suspect there's an important lesson here for the software industry. Right now, the "upgrade" that a software company sells direct for $149 is almost always identical to the $495 product that it sells through dealers. As Lotus just discovered (when it asked competitive upgrade customers to "pledge" that they had deinstalled the old version they were trading in), customers get confused when a company tries to sell the same product at two different price points. Much of this confusion would go away, we suspect, if direct-response upgrades and original retail versions simply looked different. (In fact, some developers do sell upgrades that come without the usual retail box.) Ultimately, we expect that the software industry will end up with two dominant sales channels--retail and direct--each of which reaches different customers, often at different price points. Clearly, there are some tough questions ahead about how to balance these two channels and to convey consistent value messages to customers. But that's a healthy opportunity, not a simple sign of price erosion.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Soft-Letter
Date:Nov 24, 1991
Words:927
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