Subject: RE: A few here may have an opinion on this
From: "Larry M. Augustin" <lma@lmaugustin.com>
Date: Thu, 24 Oct 2002 11:24:32 -0700

I frequently see mention of "low marginal cost to distribute" in
discussions over software pricing.  Don't ever confuse "cost to produce"
with "value".  This is a common mistake (not just for software), and
usually leads entrepreneurs to charge too little for their product.

When thinking about pricing, think about the value to the customer, not
the cost to produce.  (This is called "value pricing".)  If I produce a
product that enables a large company to run a multi-billion dollar
business, and make huge profits, why shouldn't I charge them a lot for
that product?  The value to them is huge.  They will pay for that value.
Hence the price of the product can be huge relative to the cost to
produce and distribute.

I've found that most engineers don't think this way.  They think of
pricing as "cost + markup", not "value to customer".

Note that products with high value tend to have high gross margins when
priced appropriately.  Hence gross margin is often considered a measure
of value.

Obviously there are other factors such as competition, etc. that will
impact pricing.  But that doesn't change my assertion that fundamentally
the way to think of pricing is in terms of value to the customer.

Larry 

--
Larry M. Augustin, lma@lmaugustin.com
Tel: +1.650.966.1759, Fax: +1.650.966.1753