Selling More For Less

Today I received an email from Kubotek announcing “good news for procrastinators” informing me that the $99 sale for their Spectrum Viewer has been extended to 31st October. There was a link in the email titled “See what a CAD Industry Blogger had to say“. I wanted to know so I clicked it. Imagine my surprise when I was taken to this post on my own blog.

Of late, there has been some talk about CAD software pricing. In my last post, I explained why we decided to continue offering our Alibre Design add-ons at a 50% discount. I wrote:

we figured that selling more for less was more profitable than selling less for more.

There is a view that since software is abstract, the main cost involved is the development cost. Unlike tangible objects like cars, where you need to spend money on raw material, labor, overheads, etc. to produce each and every car that sell, in the case of software you simply spend to develop it once and you can sell an infinite number of licenses at little extra cost. I could not disagree more. Actually the development cost is only the tip of the iceberg. The real costs begin when the software gets into the hands of customers who put it to use in the real world. It is my belief that the cost of supporting software increases exponentially along with the complexity of the software, more so with the complexity of the data that the software is made to process.

I figured this from personal experience by simply comparing the amount of time that we spend on a particular product before and after it is released. It is not uncommon for our support engineer to start importing a mammoth file sent by a customer and have the computer lock up for 15 minutes. It also takes a tremendous amount of time to figure out why a file does not import or export correctly, fix it if possible and send it back to the customer. It is one thing to offer support and help to a customer who has already paid for a product. It is quite another to offer help and support for free to a prospect who is trying to figure out whether our product will work for him. There are times when we realize, much before the prospect does, that our product will not work for him. Yet we continue to help and recommend alternative approaches. All this takes time, which in turn costs money. But we realize that it goes towards building a relationship with a prospect in the hope that one day he will become a customer. Thankfully, more than often that is precisely what happens.

In my opinion there are two other factors that affect software pricing – perception and purchasing ability of the customer. A software may have taken a tremendous amount of man hours to develop or will require a large amount of time and resources to support, but to the customer it may go to solve a simple problem. Conversely a product may be developed and supported easily and quickly but may be a life saver to a customer. I have learned that the perception of the customer matters, not the amount of work involved in development, testing and support. The customer is only concerned with the benefit that a particular product will give him. In his mind, he has already put a dollar number to that benefit and most probably will not deviate a great deal from that number.

Regarding purchasing ability, its really a matter of simple math and it brings me back to my earlier “selling more for less” statement. There are times when a customer understands the benefit of a software and knows that he needs it, but he either has the money or he doesn’t. If he doesn’t have the money, he looks for other options, which are usually time consuming and/or inefficient. This is precisely when a developer needs to make the “sell more for less” decision.

Our data exchange plug-ins for IntelliCAD (and now Alibre Design) are priced at $95, while those for other CAD systems are priced largely at $195. There is a reason for that. The reason is not that these plug-ins cost us less to develop or support. In fact, IntelliCAD plug-ins cost us much more than the equivalent ones for AutoCAD, because we need to test and modify them for all the IntelliCAD variants out there. The reason is that most IntelliCAD customers simply cannot afford to pay $195 for a data exchange plug-in. If they could then I guess they would be using AutoCAD, right?

However, there are limits to the “sell more for less” philosophy. Software developers often use components licensed from third parties and cannot arbitrarily lower their prices without taking into account their obligations to pay royalties and other licensing fees for each license sold. Some license agreements are structured in a way to allow developers to sell an unlimited number of licenses for a fixed (and usually large) annual license fee. In such cases developers need to do the math to see if they will be able to make enough money at the end of the year by selling more for less.

My thoughts above only scratch the surface of software pricing. I have not talked about reseller commissions, localization costs involved in selling to international markets, currency fluctuations, taxes and a whole bunch of other factors. But most importantly, I have said absolutely nothing about the cost of marketing. Maybe that probably because I hardly do any. But factors such as perception and purchasing ability come into play only after a prospect has come to know of your product, which happens mainly due to some form of marketing.

They say to make money you need to first spend money. And that is precisely what marketing is all about. The key is to select the right marketing approach or a right combination of approaches. As a developer, I can say with a decent amount of certainty, that if I spend a certain amount of time and/or money developing a product, I will have a product, unless I have set out to do the impossible. Same goes with spending money on supporting a product. Most of the time, a customer will go back with his problem solved. However, I cannot say the same for marketing. That’s an entirely different ball game. I am of the opinion that good marketing is all about predicting what your prospect wants to read/hear and tell him exactly that without lying too much. And if you need to lie, doing it in a way that you don’t get caught. Like programming, marketing is an art and just like good programming talent, good marketing talent also comes at a price.

While customers may be pleased if software developers start selling more for less, developers need to take into account all these costs that I have only briefly touched upon in this post before even considering the option. Like I said, the cost of supporting a product far exceeds the cost of developing it. That is why Alibre offered a 90% discount on their software but, if I remember correctly, maintenance was not on sale.

And another thing. Selling more for less will work only if there is more to sell to in the first place. The CAD software market is not infinite. Some are of the opinion that it is saturated, which makes it all the more difficult to come up with the numbers that are required for a “sell more for less” strategy to work.