I’ve been thinking a lot lately about pricing and business models. When we started in the business, we developed high-functioning software calculators for Blackberry, Palm, Windows Mobile and Windows and were able to derive prices in the $60-$160 price range, depending on the product and niche. After a series of customer surveys, reading other developer blogs and books, and playing with our own prices in Apple’s App Store, it has become clear that these customers are no longer willing to pay these kinds of company-sustaining dollars. Instead, the price expected is diving toward 0 and there is now a disconnect between “price” and “value”, at least for digital goods, that had been there in the past.
(Please keep in mind: I’m not complaining. It’s reality and I’m trying to figure out how to adjust.)
In the old days, there were two classes of software: Nice To Have and Must Have. The Nice To Have software was just that. It was great if I had it but if it’s not there, I won’t fret about it. Since the customer really didn’t need it and there was no urgency to have it, customers didn’t value it and the price was low or free. Must Have products were the opposite: it was needed and there was urgency to have it, and thus prices were high. While we were developing a niche product, it was a high-need item within those niches and we could charge good money for that software.
Now it seems like the market has shifted. Now, because of the breadth of the Internet and the App Store and the ability to find people who Must Have your product or service, it seems that the Nice To Have category of products has disappeared. Instead, Must Have has split into two segments: Must Have for me personally and Must Have where I am a contributor.
If I’m a contributor — meaning that there is something I am creating that must be retained or stored or shared — than I am willing to pay for it. But if it’s for personal use than the expectation is free.
When did this change? I don’t know but it was occurring long before the price pressure of the App Store. Google has been rolling out “free” services (meaning free to the end-user) for years and the freemium model (where some stuff is free and other stuff is paid for) has become a predominant model for web applications.
We, too, have been going through a tremendous transformation, re-evaluating what should be paid for and what should be free in the FastFigures eco-system, re-evaluating whether we are a mobile application with web components or a web application with mobile extensions, and trying to figure out how we build a stable and growing company again.
Elia Insider 
Elia,
another way to think about the price is to start with the price point that fits the model you’re pursuing, and build up the product (or product components) until you’ve built enough value into it to justify the price. Don’t care if it’s software, hardware, solution, consulting.. can be anything really.. Everybody’s got an opinion on pricing and there’s no lack of theories, but I really find this to be a better way in a lot of cases.
That’s an interesting perspective. Thanks. I do think there has been a change in user expectation around pricing. I can fight that or I can embrace it and use it to fulfill product vision in an alternative way. It’s impacting everyone when it comes to software. Mobile prices have dropped over the past ten years, desktop prices are coming down, too. And those who don’t embrace these changes will be left behind. Can Microsoft, for instance, really charge $400 for Office or $300 for Windows 7? It seems far fetched.
Hi Eli, First I really enjoy your blogs and loved your video on how to make money on the iPhone App Store. I have been struggling with the above question myself. People’s expectation on software and web applications have definitely changed. I think there are several factors:
1- Too many competing alternatives in a category. This drives down price.
2- Cost of finding alternatives has been dramatically reduced because of search and online stores. This drives down the cost of seeking and trying alternatives. If it is easy to find 10 other alternatives in seconds then you are toast if you just compete on price and vanilla features.
3- VCs funding companies with no business models. That may have changed since the current recession. Wait long enough and some stupid VC will fund another company with no business model.
4- Companies like Google giving away solutions for free.
5- Decreasing consumer discretionary income and corporate profits. I think this trend is here to stay for a while.
I am not sure I agree if I agree with your statement that there is a disconnect between price and value. price goes down if there are too many competing alternatives. Take the case of Netscape and IE. IE gave it away for free, while Netscape charged $39.99. People found that the free version was good enough so why pay for Netscape. You are competing with a lot of alternatives both within and without your category. I think all of us need to find value beyond traditional software licensing models. It will be tough to charge for single function software beyond $9.99. The traditional software market is about to become equivalent of a dollar store – where generic products become no more than an impulse buy. We have to think beyond current values to succeed.
Moin
Thanks for your comments, Moin. The disconnect between price and value is illustrated by your example: IE at the time was no worse or better than Netscape, yet it dominated. People didn’t discount IE because it was free and assume it’s quality was worse because the product was worse and continue using Netscape. Instead, people switched en masse.