Printer Friendly

Special report: new pricing, new models.

Software pricing is a perennially fascinating (and obscure) topic. But we've noticed a new urgency (perhaps "pain level" is a better word) lately about pricing trends and models, inspired by some very fundamental changes in the software marketplace. So we've decided it's time to take a closer look at how several new pricing models are beginning to impact the software industry.


Hardly anyone these days questions the notion that software prices are falling. And in fact it's hard to find a company that isn't touting some form of price promotion, whether it's the (allegedly) short-term discounts that Microsoft and Borland are deploying to entice database buyers, the flood of jazzy competitive upgrades, or the latest everything-but-the-kitchen-sink bundles and suites.

But are all these promotions and deals really evidence of an industrywide decline in prices? Not necessarily. We've been tracking retail street prices, for example, which are ordinarily a sensitive indicator of declining wholesale prices. Somewhat to our surprise, it turns out that street prices have remained remarkably stable even in competitive categories like word processing and spreadsheets. And when we look closely at upgrade prices, we find a fair number of titles whose prices have quietly crept upward in the last year or two.

The statistical indicators can be equally ambiguous. For example, Sales & Marketing Magazine, which compiles an annual directory of more than 900 horizontal and vertical applications used in sales environments, reports that the median price of all these packages is still $495--a figure that's stayed dead level over the last four years. Meanwhile, the Software Publishers Association says that its aggregate sales numbers for 1993 show that growth in unit shipments (30%) has outstripped revenue growth (11.6%), which suggests an industry-wide decline in unit prices.

When we try to make sense out of such evidence, it becomes clear that no single trend line adequately defines what's going on in software pricing. Instead, we believe that the key issue is market segmentation.

Increasingly, software companies have begun to differentiate their products--and product prices--according to customer type and delivery channel. Thus, software price tags may vary considerably depending on whether the customer buys a single retail copy, an upgrade, a component in a suite, a hardware bundle, a corporate volume purchase, an academic or private label edition, a trial offer, a network node, or any other configuration that someone thinks is worth testing. Some of these segment-specific prices are highly volatile; others don't budge.

So instead of looking for a single industry-wide pricing trend, we're left with a more complicated question: Which market segments have experienced the most significant price pressure, and what responses are likely to be most effective? Here's Our perspective:

* The life cycle customer: The U.S. software marketplace has undergone a massive shift from a market of novices to one where installed base customers, are now the dominant force. Novices typically focus narrowly on feature and technology comparisons; the installed base customer is more likely to pay attention to such factors as service quality, efficient product delivery channel s, price, and compatibility with entrenched standards. To the installed base buyer,

moreover, the payback from "improved" product features has to be weighed against

the switching cost of migrating to a new version or to a competing product. That

payback is rarely very high, and it is certainly lower than the benefits from first-time automation.

As a result, experienced buyers tend to push prices downward, at the same time that they put pressure on developers to deliver higher levels of service and support. But experienced buyers also alter the marketing model: They tend to become life cycle customers, who generate a steady stream of revenue from follow-on products and upgrades. Thus, a $99 "introductory offer" may yield much less initial revenue than a traditional retail sale to a novice user, but still produce more total income over a three- to five-year period.

Of course, life cycle income only materializes when a company produces salable follow-on products. So we expect that price declines in the installed base market will turn out to be a nonissue; what will matter more is whether developers can create revenue growth by inventing new installed base products and services.

* The Windows market share wars: The industry's most punishing price wars have taken place in the Windows market, where almost all the major applications developers have been slashing prices in the hope of buying long-term market share. What's interesting is that similar price-cutting strategies almost invariably failed in mainstream DOS markets. Low-priced (and sometimes technically superior) rivals never succeeded in taking much permanent market share away from 1-2-3, dbase, WordPerfect, PageMaker, or other market leaders. In fact, we can't recall a single market leader that was displaced by a lower-priced clone.

So why are price strategies suddenly so popular in the Windows market? Part of the reason, certainly, is Microsoft's fondness for price-cutting tactics (Soft.letter, 10/31/92). At the same time, Windows competition is heavily concentrated in just a few categories--word processors, spreadsheets, presentations, and now databases. So there are more large companies struggling for dominance in these few niches than there were in the DOS market.

Our guess is that the Windows price wars eventually will taper off once strong market leaders emerge in the various applications categories. But most of the contenders in the price wars (especially Microsoft) have very deep pockets, so it's likely that richer companies will keep pushing prices lower and lower, to squeeze out the weaker players. There's no easy resolution here; ultimately, we expect that the Windows price wars will be so punishing that they cause the collapse of two or three of the industry's biggest companies.

* The emerging consumer market: In the last two years, consumer buyers finally have become a serious factor in the PC marketplace. The size of this segment is striking: Worldata, the largest broker of computer-related mailing lists, says that more than eight million of the 14 million names in its combined databases represent consumers who have bought or registered products at home addresses (Soft.letter, 9/26/92).

Not surprisingly, these consumer buyers tend to be far more sensitive about price than their business counterparts. Thus, it's rare these days to find a consumer software product priced much above the $100 level. But these declining prices are offset by the fact that consumers are becoming more frequent buyers; like the installed base customer, they now represent (potentially) higher revenue to developers who understand consumer-style continuity marketing.

As the consumer segment grows, we expect to see a gradual decline in software prices of perhaps 20% a year for the next three years, which will bring prices to a level slightly above traditional hardcover books. More importantly, however, we believe developers will put much greater emphasis on the merchandising of software prices. Trial offers, special discounts, rebate coupons, free add-ons, and other consumer-style price promotions will become more important for success in the consumer market than the absolute price of the software itself.

* Localized software, global pricing: In the last year, Europe has experienced a widespread collapse of its traditional value-added reseller channels. In place of a patchwork of high-priced, locally-supported products, European buyers are beginning to see an American-style marketplace where price comparisons are easier to make. Lotus and Microsoft are already working to establish common pricing throughout all European markets; we expect that this trend will finally yield prices that are nearly equivalent to U.S. standards (and the same pattern will prevail eventually in other, non-European countries). Since developing and supporting country-specific versions can be expensive, this downward price trend could make international revenues considerably less profitable than they now are.
COPYRIGHT 1993 Soft-letter
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Date:Jan 15, 1993
Previous Article:Artisoft.
Next Article:Computer Associates: an enterprise pricing model.

Related Articles
Primary Commodity Prices: Economic Models and Policy.
Pricing for profits.
Factor substitution in long-distance telecommunications.
Interpreting the cyclical behavior of the price level in the U.S.
Improving business reporting: wheels in motion.
Chair's corner.
Rapid Prototyping.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters