Value-based Pricing for New Software Products

2 February 2017

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. No tool in the marketing toolbox can increase sales or destroy demand more quickly than pricing strategy.

The pricing decision is one of the most critical decisions that a firm can make in the launch of a product.Managers in the software industry have traditionally developed their pricing strategies by overemphasizing cost-related criteria at the expense of focusing on the value of the product to the customer. Cost-based pricing strategies are focused on short-term value to the vendor. Conversely, value-based pricing is based on the customer’s perception of the value of the product, not on product costs (see Figure 1). Value-based pricing strategies are focused on creating long-term value for the customer.From a marketing perspective, the goal of pricing strategy is to assign a price that is the monetary equivalent of the value the customer perceives in the product while meeting profit and return on investment goals [37]. This paper posits the view that traditional cost-based approaches to software pricing are short-term, tactical in nature, and place the interests of the seller over the interests of the buyer.

Value-based Pricing for New Software Products Essay Example

Conversely, pricing approaches based on customers’ perceptions of value are strategic and long-term in nature since they are focused on capturing unique value from each market segment through the pricing mechanism.

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