Is Your Software Better than Free?

Posted on June 20, 2008 | Filed Under Value | 1 Comment

Open software is in the news every day.  Much of it is licensed for free.  For priced software, K&R hears, time and again, sales pitches similar to this, “We’re providing you with $100,000 (Euros, Rupees, Rubles…) of software value for only $63,000 (just sign here).”  If you are a buyer, you have almost certainly heard this type of argument.  If you have used this argument as a seller, you can be almost completely certain that it did not close the sale.  Even if the sale closed, this argument was not what made it happen.  Let’s look at the reasons.

First: a certain logic is at the heart of this argument.  One version goes like this:  “Price is a shorthand description of customer value, and a lower price is better because it makes the same value available for less.”  There are a few negotiation issues with this logic.  The primary one is that price does not describe value.  As negotiators, we have defined a rule: “You can ask any price that you want (repeat twice)”.  The seller’s initial offer (often starting at a list price) can be arbitrarily set.  Examples abound of software that sells at or near list price and of software where typical discounts exceed 50%.  A smart buyer will understand that list price is a reference point, not a value statement.  In fact, value for a given software package always starts at $0.  After all, if a lower price is better (from our opening “sales argument”), then isn’t free as valuable as something can be?

Second: welcome to the world of Open Source.  Almost no one (any more) falls for this reverse argument to the one we started with above: “Since price is a shorthand description of value, and since you don’t charge, your software has no value.”  (We’ll ignore for the moment the complexities of support, update, risk and so on, and just concentrate of acquisition costs.)  As a simple example, if Open Office and Microsoft Office both include the ability to create documents (and more), but one is free and one retails for about $400, at least one of them is mispriced.  Differentiation is key to determining which one – and this differentiation varies by user.  Which leads to…

Third: Value is determined by the buyer.  Every buyer is a niche market with exactly one member.  Sellers who mistake those buyers for generic opportunities for their products and solutions will be significantly less successful.

As a buyer – remember that your best position in a negotiation is a set of realistic, competitive options.  As a seller – remember that your price is driven by your ability to convincingly portray your solution as “the only one that can do the job”.  The struggle over position on the leverage slope is the real negotiation – if you win that struggle, the pricing discussions will be more rewarding for your side. (TD)

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