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                          Software Pricing Strategies
                                              Jasvinder Singh
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companies in a strategic pricing center helps in          Cost-based pricing is thrown into a confusion by a
making qu...
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shown on the company's balance sheet and                  unmeasured factors [8 ,9]. This type of customer-
devaluate ...
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overhead allotment process for assigning costs such      products that are seen to be dimensionally unique
as logistic...
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clearly customer-valued oriented [16, 17, 18].           clasp discounts for large purchasers, government,
           ...
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on investment. The added benefit to IBM of this
idea is IBM's cost did not augment proportionally,        3.3.1 PER-US...
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(ASP) model [29]. This model bills for outsourced        manner have low reservation prices. The penetration
services ...
8


                                                         want to invest to a great extent to evaluate product
4.1.4 BU...
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complicated and costly evaluation process for the          virus software and virus definition support. The loss
switc...
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of the product is identical. Professors pay twice as      would be zero.
much as academic students. The logic which i...
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typical manner pays attention on cost-based metrics        informed about the product and competitive
to arrive at th...
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that relate to the product's value perceptions. These      market, vendors must know the value that
value perceptions...
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                                                         management oriented economic analyses, and
Figure 2: Model...
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with assurances of improved return on investment            [4] T. Nagle and R. K Holden, "Profitable Pricing:
(ROI) ...
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[11] B. P. Lientz and K. P. Rea, Project               2002.
Management For The 21st Century, Third ed. San
Diego: Ac...
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Running," in Business Week, 2004, pp. 93-94.
                                                        [39] M. V. Marn,...
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vol. 54, pp. 3-19, 1990.                             Are Shaping Technology Industry Growth. Boston,
                ...
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Software Pricing Strategies

  1. 1. 1 Software Pricing Strategies Jasvinder Singh jsingh@cs.helsinki.fi University of Helsinki, Department of Computer Science  interpreted as an important tool in the marketing Abstract toolbox which a company needs to consider before Software pricing has conventionally been launching a product in the market. The managerial concentrated on the marketer's internal business group in the software industry have conventionally aims of covering costs, attaining specified improved their pricing strategies based on cost- margins, and meeting the competition. Pricing related criteria. Cost-based pricing strategies approaches such as flat price, tiered pricing, concentrates on the product value to the customer. usage-based, per user, etc, are often strategic in Furthermore, they are also focusing on the short- nature and easily matched by competitors, which term value to the vendor. On the other hand value- can weaken profitability by accelerating the based pricing is based on the customer's market transformation for a unique branded understanding of the value of the product. Value- product into a market, based on undifferentiated based pricing strategies pays attention on innovating price competition. On the other hand, a value- long-term value for the customer. based methods charges a price based on the customer's perceived value of the advantages From a marketing view, the aim of pricing strategy received. This seminar paper discusses about a is to set a price that the customer sees in the product value-based method to pricing that is dependent while meeting profits on investment goals [1]. This on the company's pledge to invest in the paper presents a comprehensive view about the development of its long-term pricing capital. conventional cost-based approaches to software This investment in practical methods and pricing. These ideas to software pricing are short- principles, infrastructure, process to innovate, term and places the sellers interests over the measure, analyze, and capture customer value is interests of the buyer. On the other hand, pricing the success key for long-term pricing strategy approaches are based on customers perceptions of value are planned and long-term in nature. This is Index Terms- SPS, Software Pricing Strategies. due to the fact of capturing unique value from each 1. INTRODUCTION market segment through the pricing mechanism. Software pricing strategy plays a significant role in Furthermore, we will discuss how software firms augmenting software market sales. It can be need to invest to make sure long-term benefits of  value-based pricing. The investment of software
  2. 2. 2 companies in a strategic pricing center helps in Cost-based pricing is thrown into a confusion by a making quality decision making about the product circular logic. As discussed above price is based on during the product development cycle. Moreover, it unit-volume assumptions but at the same time price also provides good understanding about how is the determinative factor for the sales volume. The customers value price alternatives and come up to inability of the managerial group in the software prices that they are willing to pay. industry to model the impact of price on volume and vice-versa calls cost-based pricing into question. 2. Pricing Background & Traditional Cost- Cost-based pricing circular logic can lead to Based Pricing Cost-based software pricing is one of the most excessively high pricing in weak markets and popular method which relies on the information excessively low pricing in strong potential markets provided by the cost-accounting system. This [4]. For example, if a company loses volume and authentic data is generated to produce operating market share to a belligerent competitor, then the results, budgets, and financial statements. managers making usage of cost-based model will be Marketing and product managers are trained to price under extreme pressure to augment prices to recover the software to yield a desired return on fully their augmented costs and to recover their lost allocated costs. There is no product approval in a margins. On the other hand, in situations of excess business development plan for a novel market demand, where a backlog of orders exist, the cost- without considering an lucrative return on based system is slow to raise prices since profit and investment (ROI) [2].This profitably calculations volume goals are being met. Therefore, the ignores the voice of the customer and serves as a company provides subsidy to the customers who layout plan for average market results. Cost-based would be willing to pay more to acquire the product pricing strategies can tap the power of the market more quickly and thereby loses out on significant sellers to force a higher price on to the seller. potential profits. An intelligent competitor who is aware of this situation can take advantage by taking The basic problems with cost-driven pricing comes these back ordered customers away. from the cost assumption made about the product cost. Firstly, unit costs are dependent on the The generally accepted accounting principles volume. As the projected volume varies, the fixed (GAAP) for determining the value of technocrat cost per unit associated with it also changes. The companies have come under considerable criticism allocation procedures, for example direct labor over the appropriateness of reported cost data [5]. hours or any other substitute metric are also GAAP accounting was developed at times when inaccurate. Therefore, product costs are inaccurate there is a clear differentiation between labor and at best and a continually moving target at worst [3]. capital. The cost of production factors such as machine tools, computers, and moving stock were
  3. 3. 3 shown on the company's balance sheet and unmeasured factors [8 ,9]. This type of customer- devaluate over times as the assets were used to value assessment is possible through refined market generate revenues. Theoretically, if company research techniques. It is also noticed that many compares its revenues and expenses for an software projects proceed without considering this appropriate time frame (including depreciation critical information. The process of collecting data schedules), then a relatively precise picture of from potential customers is expensive and time company's costs and profitability come into sight. consuming. The default measurements are the ones According to [6], when GAAP concept is applied to that are more readily determined through economic business sector where the production factors are analysis. The factor such as transaction costs labor related, such as software, it is observed that it savings and other total cost of ownership (TCO) not only produces confusing results that not only related metrics are most often used, but this method exaggerate product costs, but also can cause neglects potential value drivers that may be more valuation problems concerning the company's stock significant to the customer [10]. price. Furthermore, software companies are distinguished by the innovative efforts of their 2.2 EARNED VALUE CONCEPT Earned value is a related cost-based concept that is employees. The salaries of software programmers used for trailing a software's adherence to the and architects, under GAAP are not seen on the original project budget. Earned value pays attention company's balance sheet. This practice augments on explaining the cost variances between the product costs and places extreme pressure on the amounts allocated for the work and the equivalent pricing mechanism to maintain margins. The final dollar volume of work completed during a specified reason for too much emphasis on cost-based pricing time duration. The cost variances are noticeable to is the missing relevance of outdated accounting specific project tasks, which can then be evaluated practices that inflate product costs in the short run. for corrective action [11]. These cost-based ideas to GAAP imprecisely matches knowledge-based measure value form the basis of the main software product costs to the resulting income stream [7, 5]. engineering economics models [8 ,9, 12]. 2.1 COST-BASED CONCEPTS OF VALUE The conventional software pricing model addresses The cost-based approach to valuing software customer value which is often calculated as profit. products has relatively large support from the field Profit is figured out by deducting the software's of strategic cost management [7, 13, 14]. Those who development cost from its price (i.e., the total value are practicing activity-based costing(ABC) to the customer). In totality, the value to the approach to determine product costs notices that customer is defined in terms of particular needs conventional cost information is useless for fulfillment, good will, ease of use, opportunity managers who need to base strategic resource costs, the business value of information, or other allocation decisions on accurate product costs. The
  4. 4. 4 overhead allotment process for assigning costs such products that are seen to be dimensionally unique as logistics, sales, production, finance, and general and are valued by specific group of customers. administration to individual products can be Differentiation is basically based on features, improved by ABC methods. Conventional methods advantages that are seen to be significant, of overhead allotment use direct labor hours that distinguishing, preemptive, superior, and affordable tend to over burden less-complex products and by target customer [15]. There is a necessity for the high-volume products. On the other hand, they product developers to conduct market research in under allocate overhead cost to complex to low- order to determine which product attributes will volume products. The resulting cost distortion can affect a strong differentiation strategy. Without in produce misleading profit estimates and weak depth market analysis, the default scheme will decision making. return to cost leadership, which can be calculated with relative correctness. Low cost can be an A company's cost behavior and relative cost effective differentiator if the cost advantage is so position in an industry are obtained from the value- strong that competitors cannot match it. On the producing activities of the firm. Each value activity other hand, technology related markets such as has its own cost structure. After identifying the software, technology advances tend to reduce or significant value chain, cost of operating and asset eliminate cost advantages relatively quickly. costs are designated to the product related activities as they support. The company can assign costs to 3. COST-BASED SOFTWARE PRICING products and have a clear understanding of its real Pricing disputes is the most quarrelsome issues that cost position by analyzing the cost drivers of its arise between software vendors and their customers. value producing activities[7]. While on the contrary, Pricing resistance originates from high software ABC methodology can lead to more precise product prices and perceptions that the vendor puts its own costing but they do not highlight on how to price interest ahead of those of the customers. A lack of software products. The management group of the trust can result from oppressive, cost-based pricing. company have a more precise understanding of the As a result of the relatively big investment in real cost of the product over the relevant volume software research and development when compared range. This is helpful in knowing if a profit can be to other product costs, software vendors have high made at the price which the customer is willing to fixed cost (i.e., software development) and pay. If the price of the product is known, ABC can relatively low variable costs (i.e., excluding service show the way of better product mix and capital and support). The situation outcomes makes investment decisions [7]. software product managers to put heavy emphasis on the aims of cost recovery and rapid return on 2.3 DIFFERENTIATION-BASED STRATEGIES investment through the pricing mechanism. This Differentiation-based strategies seek to create pressure leads to pricing strategies that are not
  5. 5. 5 clearly customer-valued oriented [16, 17, 18]. clasp discounts for large purchasers, government, and members of preferred buying organizations [21] The vendors cost-driven, rate-of-return-based pricing models are supported by promising the Flat pricing also reduces the complexity of the customers improved return on investment (ROI) vendor's pricing model since the price is set to through augmented sales, reduced costs, reduced return a dependable but fixed rate of return. Prices risks [2]. Risk includes customers benefits that have are based on a financial return model, not on indirect financial effects such as innovating customer value. Prices are augmented when cost competitive advantage, legal compliance, reduced increases. America online(AOL) has used such a liability, or minimized financial exposure. These pricing strategy throughout much of its business benefits are difficult to determine, therefore life. It charged a high fixed price for dial-up Internet customers look to the default metric of augmented connectivity and justified it by offering confined return on investment through cost savings and media content. Lately, the company has been forced augmented sales as the main justification for to set a price revision to stem the loss of customers purchasing enterprise-scale software[19, 20]. The to broadband. These customers want fast study of common software pricing approaches are as connections and AOL is trying to keep them follows: occupied by offering AOL content over any broadband connection. Furthermore, a confined 3.1 FLAT PRICING backup dial-up service is also provided for outside Users pay a fixed price for limitless usage of connectivity. AOL has also switched to a lower flat- software product. This idea enables customers to rate price to keep the broadband customers [22] more easily know in advance for what they will pay for the software usage. The fixed price is usually 3.2 TIERED-PRICING restricted to a specific user or machine. Many Tiered-pricing tries to package software benefits software offerings to the consumer are priced in this according to user necessities and their willingness to manner. Some level of online support is typically pay. This idea to pricing is an effort to link software built for a limited time frame. The main product costs to detected customer value. IBM is disadvantage to this method is the lack of flexibility one among the number one software marketer to in customizing a price for individual customer make usage of tiered-pricing idea that is based on based on customers required values. Some the class of processors for its mainframe computers customers will have to pay more than they would [23]. The costs to the customers are randomly like and may be intended to seek better deals. augmented when software is executed on a more Others will enjoy a subsidy since they would be powerful system, augmenting profits for IBM. The willing to pay more for the higher value they logic involved in this states that more powerful perceive. A fixed-price strategy can be segmented to systems augments the user productivity and return
  6. 6. 6 on investment. The added benefit to IBM of this idea is IBM's cost did not augment proportionally, 3.3.1 PER-USER PRICING These are prices to the individual user who in a resulting in more profit. The premise is that the typical manner can use the product on an unlimited customer should be willing to pay more for the basic for the term of the license [26]. The price is increase in value. Since customers were doubtful of basically set on assumptions about product costs unmeasured increases in productivity, and aware of and customers usage. This idea in a typical manner IBM's software economics, this methodology offers one price for a specified number of users. augmented the already high pricing tension between Oracle has lately introduced user-based pricing for IBM and its customers. its E-Business Suite. The objective is to provide a simple licensing model that is sensitive to the Tiered-pricing is considered more favorable when customer's changing, and sometimes unpredictable the customer can easily see the increased in value Information technology needs [27]. received and the pricing plan offers desired choices. Nokia lately innovated pricing tiers for its software 3.3.2 HIGH WATER MARK PRICING development tools [24]. The developers forum is In this charges are based on the maximum number currently free, but big users of support services will of parallel users over a given time frame. be charged on a tiered basis for lot of services. In the same way Adobe introduced tiered prices for its 3.3.3 PER CLIENT PRICING Acrobat products based on how customers use them This is similar to per user pricing, except that the [25]. This can be interpreted with an example where license is designated to the workstation and can be customer create PDF documents, add comments, used by a assigned number of users. and signs them will pay in addition to the customer who has only created PDF documents. The problem which software vendors is facing boldly is that nobody knows how to define what a 3.3 USER-BASED PRICING user is anymore?. In case of outsourcing, a user This is another cost-based pricing method that have could be someone outside the corporation. User- the tendency to benefit the vendor more than the based pricing also let users pay for the software that user by maximizing license fee revenues. The may not be used as much as it is needed to justify its charge is based on the users count that utilizes a cost [28]. collection of software features over a given time frame. It tries to assign costs to a specific number of 3.4 USAGE-BASED PRICING In usage-based pricing customers pay only for what users or workstations. It is a simple model to work they actually use on a transaction basis. This model as compared with tiered-pricing based ideas. The is also known as network-based pricing model. It is principal variation on this subject are described often connected with an application service provider below:
  7. 7. 7 (ASP) model [29]. This model bills for outsourced manner have low reservation prices. The penetration services by transaction, time in use, peak period, or pricing strategies brings benefits that are seen as some other subscription metric. The application is industry standard at a price that is sufficiently low delivered over the web. In a typical manner users to generate increases in sales volume creates pay a minimal set up charge, the usage fee, and for customer value. service and support. In addition to the lower total cost of ownership for the application service 4.1.2 LOW-PRICE LEADER low-price leader aims buyers with low reservation provider model, customer can deploy their prices. This idea targets the mass-market buyers applications more quickly, which reduces their with reasonable features at a low price. The marketing time. competing pricing objective recognizes that the market has reached maturity. For example Linux 4. VALUE-BASED PRICING As discussed in § 3, software vendors often deal and StarOffice are making use of this strategy to pricing from the requirements to cover costs and mark Microsoft. Sun Microsystems initiated their attain profit objectives-often to the loss of their plan of attack on Microsoft's desktop software by customer relationships. The circular logic of the charging only $100 per user for a suite of StarOffice cost-based idea where costs sets price and price productivity applications that also includes Java- impacts sales volume throws into confusion the Linux, Mozilla browser, Java security, and email pricing process. The answer to value-based pricing [26]. The average per user license fee of Sun favorable outcome is the recognition that the price Microsystems is forty to fifty percent of that set by the customer is willing to pay depends on the Microsoft [32]. Buyers following and economic customer's value requirements, not the vendor's. value added (EVA) model would be drawn attention Buyers make decision about benefits and prices and to the lower software prices that would augment select those products that maximize their perceived return on investment provided the features, benefits value. The objective of value-based pricing is to were industry standard. provide more advantageous pricing by gaining 4.1.3 EXPERIENCE-CURVE PRICING control over value. That price should, in turn, decide Experience-curve is a competitive strategy that aims the level of product development cost that the buyers with low reservation prices. The initial price customer is willing to occur. is set below cost in order to build volume and move more speedily down the cost curve toward 4.1VALUE-BASED SOFTWARE PRICING profitability. The initial price is planned to supply 4.1.1 PENETRATION PRICING STRATEGIES volume quickly and keep out of competition. The penetration strategies aims market segments Vendors that market shrink-wrapped consumer where buyers have a high level of price sensitivity software may use this idea to aim high-volume [30, 31, 33]. Price-sensitive buyers in a typical price-sensitive segments in mature markets
  8. 8. 8 want to invest to a great extent to evaluate product 4.1.4 BUNDLING This strategy have more than one applications that alternatives. Information about price is more easy to are packaged together and priced as a single get than that about quality or performance. The high product. It also aims buyers with low reservation are price signals the high are the benefits these prices. It is basically a product-line idea since it buyers desire [34, 35, 36, 37]. In this situation maximizes sales of complementary products within buyers demand a high level of service and quick a product line. There may be disparity in response for their continued loyalty. preferences for each individual product, but overall demand is augmented if the value is perceived to be 4.2.2 REFERENCE PRICING Referencing pricing strategy involves competition greater for the bundled package. A good example is which is a variant of price signaling. In this buyers Microsoft Office Suite. The aim is to provide have high search costs and see high risk than the outstanding value by bundling products that are innovators. Referencing pricing strategy need a used together at an attractive price. Microsoft has reference point to measure the value in the price- advantage since their additive packaging costs and quality relationship. Using this idea can benchmark transaction costs are minimized. Bundling augments the higher price of an established competitor. When volume and penetration while creating hindrance to the higher-priced products are compared, show up the competition [30, 21] the value of the reasonable priced product and vice versa [38, 30] 4.2 SKIM-PRICING STRATEGIES Skim strategies aim buyers that are relatively 4.2.3 PRESTIGE PRICING insensitive to price [30, 31, 33]. These strategies This is a product line strategy that targets customers have high search costs. Some of these strategies are with high search costs who are attracted to involved in search behavior and see a high level of trademarks that have attain a reputation for high value in features, and benefits of the product. For quality and elegance [36, 37, 33]. The buyer's self example innovators are often ready to pay more image is emotionally linked to the trademark image. since they see opportunity in their ability to exploit Buyers have expectations for elegance and high the unique value of a new product. Others are not levels of support and service. ready to search and see the high price as a signal indicating high quality 4.3 HYBRID PRICING STRATEGIES Hybrid strategies combine constituents of skimming 4.2.1 PRICE SIGNALING and penetration strategies. The potential buyers can This idea is often used for segment differential be distinguished by the combinations of high search pricing of new products where time is a main factor costs, low reservation prices, and special transaction in the decision process. Innovators with high search costs. Special transaction cost might include costs and high level of trust in the trademark do not
  9. 9. 9 complicated and costly evaluation process for the virus software and virus definition support. The loss switching cost for changing software vendors. leader idea is a variant approach. The complementary pricing strategy is used by the 4.3.1 COST-PLUS PRICING Cost-plus pricing strategy is a competitive pricing software house(SPSS, Inc) incorporated in Chicago. idea that is used by the software marketer that The company does a license marketing for a basic creates systems for the government, or other big package of statistical programs at an appealing customers, where uncertainty involved are difficult price, especially for academic users. to measure, and special transactions costs are high. This strategy assures the marketer a rate of return on Intellectual users that choose for extra project costs [39, 40]. This strategy should be functionalities are charged a payment for extra arranged as a skimming strategy since cost usually programs that rely on the functionality of the base are higher than budgeted. In response to the high module. Microsoft continued complementary prices that originates as a outcome from cost-plus, pricing to take advantage of its complementary government customers place commercial off-the- relationship with computer manufacturers such as shelf(COTS) pricing specifications in the contract Intel micro processors to attain exclusive pricing where non-custom software applications can meet power control for operating systems and office their requirements. application software. The company is also putting its efforts to use a complementary pricing idea with 4.3.2 COMPLEMENTARY PRICING its web services offerings and furthermore, meeting It is a product-line strategy that taps the special customer resistance as it returns back to a cost- transaction costs of products that are used based pricing mentality [41]. collectively but sold separately [21, 40]. The base product (i.e., product-line pricing ) is sold at a low 4.3.3 PREMIUM PRICING price that minimizes resistance to purchase. Higher Marketers address diverse groups of customers by profits are then made on the complementary making use of product-line strategy that addresses consumable products (i.e., product-line pricing) or the higher search costs of some groups and the services due to the special transaction costs. For lower reservation prices of others [46]. This work is example application service provider(ASP) also known as price lining. The idea is implemented software services minimize the front-end by pricing versions of the product to address entry investment and special transaction costs by level, intermediate level, and high-end payment removing the necessity for purchasing softwares or buying customers. Prices are set, based on the levels servers [29]. Profit is successfully assured on the of the value the buyer sees in each market segment. higher amount due to complementary transaction- For example, EndNote is a famous bibliographic based services and support. The same relationships software product that is priced differently for occur in the selling of printers and ink, and anti- students and professors, although the functionality
  10. 10. 10 of the product is identical. Professors pay twice as would be zero. much as academic students. The logic which is 4.3.6 SECOND-MARKET PRICE DISCOUNTING involved is that the student market (i.e., low In case of second-market price discounting, reservation price) is much bigger and has lower unit marketers present an existing product to a new costs , than the professional market (i.e., high search market where buyers are more price-sensitive than costs), which is small and sees higher product the primary market, and furthermore have advantages due to publication requirements of their identifiable special transaction costs. For example, profession [42]. Microsoft has offered second market discounts to the buyers that are looking attentively for the 4.3.4 RANDOM DISCOUNTING implementations of Linux based operating system in A random discounting idea maintains a high the server market [17]. Microsoft is also skimming price but offers discount on arbitrarily contributing a standard solution with predictable basis as an incentive to new buyers to try the costs versus the Linux installation that might product [42, 40]. The price break serves to draw generate higher installation, customization, and attention to the product. This strategy can be made maintenance costs. The second market pricing applicable for a variant of the application service discounting is often used to enter in international provider (ASP) pricing scenario where users can try market and private generic product market the product at a discount before they sign up for a long term license 5. SHIFTING FROM COST TO VALUE As the software business develops and involves 4.3.5 PERIODIC PRICE DISCOUNTING more competition, it is increasingly significant that The periodic price discounting strategy innovates pricing strategy be based on perceived customer customer value for successive class of buyers with value. The scheming of the software should be with increasingly low reservation prices. The initial idea the knowledge of how customers value particular pays attention on skimming the inelastic demand of attributes and how much they are willing to pay for the innovator then reducing prices on a predictable them. It is a fact that those software products that basis as the market matures in order to attract more deliver superior value will prove to be a success in price sensitive customer groups [40]. Intel make use the market place. In order to be successful, software of this idea to market its microprocessors. This idea development must become more value based. The works best for the products that enjoy somewhat following discussion look over the fundamentals of long technology and market life cycles with several customer value analysis and the factors that drive applications across many segments [39]. Software the customers perceptions of value. companies generally do not use this idea since they would prefer existing customers to upgrade to the 5.1 CUSTOMER VALUE ANALYSIS new version where their costs for getting customer As we examined above, software marketer in a
  11. 11. 11 typical manner pays attention on cost-based metrics informed about the product and competitive to arrive at their product prices. Once the marketer offerings. It is similar to the reservation price. EVC has quoted a price, potential customers without any basically answers the question what is worth to the difficulty can compare the price with offers from the customer?. EVC also calibrates the life cycle competition. On the other hand, if the marketer economic expenditures and advantages to the user instead offers demonstrably superior value, even at of one product when compared with a reference a higher price, the gain is far less easily duplicated product. Software products are evaluated on by the competition [38]. The following value ideas purchase price, installation costs, maintenance are fundamental to the development of value-based costs, operating costs, disposal costs, and pricing strategies. advantages that can be converted to money over the use cycle. These costs and revenues are standards 5.1.1 PERCEIVED VALUE against the buyer's reference point [38, 47] Not all the customer value drivers have economic effect that can be measured directly. A software 5.1.3 ECONOMIC VALUE ADDED (EVA) product that has better graphical display may be Generally stated, economic value added measures a more charming to the eye, but has no value in the company's net operating profit after taxes. It conventional economic sense. A buyer may feel concentrates on the company, on earning a target safer to buy software from IBM if there is a higher rate of return, over and above the cost of capital perception of reliability, trust, and commitment to [48]. Both software developers and buyers use the the market, but it is difficult to measure objectivity idea to answer the question about the asset in product value terms. One practical method that is generation returns above the cost of capital. If we often used to measure perceived value is conjoint talk about software or other Information technology analysis [43, 44]. This practical method enables investments, customers substitute the monetized net managers to compute the consumers utility financial benefits of the investment for net operating functions for individual variables and to understand profit. Moreover, EVA forces managers to measure how they are combined, traded off, and otherwise the financial impact of software investments and to valued. The conjoint analysis is beneficial for be aware of the capital cost impact on the pricing since the feature trade offs at different levels investment returns. of price can be mapped [45, 46]. 5.1.4 PRICE SENSITIVITY MEASUREMENT (PSM) Price sensitivity measurement models are beneficial 5.1.2 ECONOMIC VALUE TO THE CUSTOMER (EVC) The economic value to the customer is alternatively for estimating market demand and for calculating known as value in use. EVC is the highest payment the proportion of buyers that would buy the product that a customer would be ready to pay for the within a specific price range [49, 30]. PSM decides software, on the assumption that customer is the limits of buyers resistance over a range of prices
  12. 12. 12 that relate to the product's value perceptions. These market, vendors must know the value that value perceptions are market specific and based on customers see in the product. This classification the buyer's perceptions of product value, buying includes identification of the customers value intentions, and expenditure capabilities. The outputs drivers, price sensitivity, Economic Value to the from the model in a typical manner are the upper Customer(EVC), and other price related and lower bounds for the acceptable price range and characteristics. This classification may include an the optimal pricing point. In a nutshell, PSM is a assessment of the attribute (i.e., feature-advantages) very useful for pricing alternate software trade offs that customer is willing to make at configurations in the early stages of development various price levels. Once the price the customer is and throughout the development cycle. ready to pay is known, this information is integrated with cost-volume estimates to know if the product, 5.2 CUSTOMER VALUE DRIVERS as configured, can be sold at a profit [53]. This kind In order to create the foundation for setting prices, it of information, which is interactive with the market, is a necessity that a product developers and can be used to adapt the product's design to gratify managers should understand what the customer's the customer's value expectations or to call off the value drivers are, and how significant each is in the project. purchase decision making [50, 51]. Customer value drivers are emotional link that summarize customer beliefs about the product and company, create positive attitudes and feelings, provide the basis for differentiation, and provide the reason to buy [50]. Value drivers are the expression of the customers evaluations of the product, the perceived credibility of the vendor, and the confidence the customer has in the trademark [52]. The customers value drivers need to be reflected in the design requirements of the software if the value is to be subsequently captured by the pricing mechanism on the product's launch 6. IMPLEMENTING VALUE-BASED PRICING 6.1 THE VALUE-BASED PRICING MODEL Customer-value based pricing idea is particular to market segment, since value perception vary between customer groups. After choosing the target
  13. 13. 13 management oriented economic analyses, and Figure 2: Model for the development of customer- managerial rules. Adding a margin to standard cost value based pricing strategies [53] is not a protective way to price software products [41, 17, 18]. Software companies are required to Price strategy relies on the software vendor use value-based pricing methodologies that model knowledge of customer characteristics (i.e., value actual customer value, price sensitivity, and values drivers, search costs, reservation prices, transaction in use scenarios [19, 20] costs, buying situation), the competitive situation, product cost, and pricing aims. The mechanics 7. CONCLUSION shown in the figure can be assessed at any time in The paper presented a review of coeval cost-based the development process in order to associate software pricing models. These models have customer price perceptions to product developed from a financial view based on the configurations. This initial-stage examination, by production, distribution, and consumption of linking product cost estimates to anticipated prices, software product, services, and with the theory and can help to determine if a particular product management of economic systems and internal cost- configuration should be pursued [10, 49, 54]. The drivers of the software life cycle. As software information about the price gained in this way can markets have become more competitive and buyers be used to price the products for launch and to are faced with more options, cost-based pricing check post-launch pricing capacity. models that ignore customer-value necessities can no longer assure a favorable rate of return to the This type of value-related information is greater in software marketer. A systematic analysis of quality to the cost-oriented method that is most customer value drivers indicates the cost-based often used to predict the product costs, project models attracts to price-performance value drivers
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