The Elements of Software Pricing

Abstract

In this chapter we will describe the various ways in which the products of development efforts are converted into economic worth. While nominally this is “pricing,” in reality the subject is broader because of all the varied ways in which intellectual property, including software may be converted into financial value today. We will begin with a section on objectives, followed by the role of the software pricing manager and interrelation with the product manager and then introduce the Pricing Framework which will provide the structure for the rest of the chapter. Please note that the role here designated “software pricing manager” may, in some companies, be referred to as “pricer.” While we have nothing against that term, it may conjure up the role of someone who simply takes cost parameters, runs them through a financial model and comes up with a price. We have in mind a more comprehensive set of responsibilities which we believe is better conveyed by the title we have chosen. This chapter is written from the standpoint of a large software vendor with broad portfolio and is meant to provide the level of guidance needed for a large and complex environment. Smaller companies, whether selling software or devising charge-back schemes for their own in-house IT, may not have organizations large enough to support the roles of a dedicated software product manager or dedicated software pricing manager. Furthermore, some tasks will not be applicable to all companies, for example, if a vendor does no business outside his own country, he has no need to perform the tasks in the sections on global pricing; the B2C (Business to Consumer) company can ignore the tasks in the sections on selling to large enterprises. While you may feel it's useful to read the entire book, and we certainly encourage you to do so, we have provided a roadmap in section 6.4 to indicate which sections are most appropriate for which readers. Nonetheless, the tasks described which are appropriate to your business are important even if the organization cannot justify having individuals performing each of the roles we describe. For example, the software pricing manager and software product manager might well be the same person in a smaller company.