Value-Based Pricing For New Software Products: Strategy Insights for Developers

Software pricing has traditionally been focused on the vendor’s internal business objectives of covering costs, achieving specified margins, and meeting the competition. Pricing methods such as flat price, tiered pricing, MIPS-based, usage-based, per user, per seat, and pay as you go, are often tactical in nature and easily matched by competitors, which can undermine profitability by accelerating the commoditization process. Conversely, a value-based approach charges a price based on the customer’s perceived value of the benefits received. Value-based pricing methodologies can be used to estimate the market value of new software concepts at various stages of the development process in addition to pricing new products for launch. This paper describes a value-based approach to pricing that is dependent on the firm’s commitment to invest in the development of its long-term “pricing capital.” This investment in methodologies, infrastructure, and processes to create, measure, analyze, and capture customer value is the key to successful long-term pricing strategy.