Software pricing structures in electronic commerce: 3 different cases

Abstract

<p>Software is the intellectual capital output of the codified knowledge of a programming team. The development cost is high, but the variable cost of sale is substantially lower (negligible) than for hard goods. Unfortunately, there does not exist a valid or reliable measure to value software. Software is further complicated by architectures. Client-server architectures and combined software-service solutions bring new factors to the pricing decision. With high development costs and low variable costs, one must ponder the methodologies and assumptions used to price software. This paper will examine three cases detailing the rationale behind the pricing decision made and their effectiveness in achieving the business goals of the product (and service). The three cases were chosen with an interest in diverse architectures, usage, and vendor business objectives. Architecture can change many factors such as the dynamfos of a market and the cost of ownership to the buyer. Usage stems from both buyer business processes and architecture. Usage is one of the typical metrics of value. However, as the cases are investigated it is shown that in some cases other variables such as flexibility are more important generators of value. To the vendor, the most important metric is the ability to achieve the business goals of the product. A product may be produced as a test platform for future products, thereby lowering the financial performance objectives and increasing the volume and degree of usage as the objective. The business objectives of an application are determined by business strategy that takes into account factors internal and external to the vendor. The negligible variable cost and varying value (per buyer) provides a great deal of flexibility to vendors. The trend has been to align pricing to the activities that buyers realize value from. However, new architectures change the nature of where value is realized and how service becomes pait of the equation. There does not exist a perfect generic pricing model. Vendors must understand the value they provide to their customers and create a price structure that aligns pricing with value realization, but more importantly facilitates their business objectives of the product (and service).</p>