8 ms·

Don't just roll the dice – Software pricing guide (2012) [pdf]

488 points by MatthewBF 7y ago

MatthewBF 7y ago
A helpful guide by Neil Davidson on how to develop a revenue model for your software business.
dang 7y ago
I remember this as having had prominent discussions on HN in the past, but I searched and can't find them. Anyone?
- kick 7y ago
  Looked for a few minutes. My best guess is that if there was one, it was probably submit under a different link with an editorialized title. On Red Gate's site alone, there's at least a few copies, along with the one on Davidson's site and the other copy that used to be on his site.
  - deleted 7y ago
    [deleted]
  - MattHilbert 7y ago
    Hi - the book is freely available from Neil Davidson's personal website at: https://neildavidson.com/downloads/dont-just-roll-the-dice-2.0.0.pdf https://neildavidson.com/downloads/dont-just-roll-the-dice-2... And from the Redgate Software website at: https://www.red-gate.com/library/dont-just-roll-the-dice https://www.red-gate.com/library/dont-just-roll-the-dice Hope that helps.
damir 7y ago
Wow, thanks for this PDF. Can't believe this is freely available... IMO they could easily charge for this and I'd gladly pay...
- Arkanosis 7y ago
  I'd be glad to pay now that I've enjoyed reading it… but I'd almost certainly not have read it if I had had to pay first. I like the approach taken (among others) by Matthew Butterick for Practical Typography [1]: I've enjoyed reading his book the same way and gladly paid for it /after/, as he asks, even though I would not have bought it at first. [1] https://practicaltypography.com/ https://practicaltypography.com/
- hermitcrab 7y ago
  I think the author made enough money off co-founding Redgate Software that he probably doesn't need a few dollars off you. I read it when it first came out. Its very good. Pricing is a surprisingly interesting and deep subject that is heavily intertwined with microeconomics and psychology.
ya3ad 7y ago
Thanks :-)
mojuba 7y ago
This article I think comes very close but never answers the central question here: how to find the price that generates maximum revenue. I have a hypothesis that price tolerance follows Pareto distribution, i.e. the function of the number of people willing to pay any given price for the same product must have the same shape as the overall wealth distribution among your customers. Therefore it should be theoretically possible to find your peak price that yields maximum revenue in the following three steps: (1) take measurements at several different price points (A/B test) (2) find the Pareto parameters for your customers (3) solve the differential and find the peak. The same in a bit more detail: https://medium.com/@hovm/finding-the-max-revenue-price-mark-for-digital-products-24cef24f746d https://medium.com/@hovm/finding-the-max-revenue-price-mark-...
- Darkphibre 7y ago
  Reminds me of the articles that came out in 2016, where we --finally saw the first comprehensive Supply/Demand curve in the wild: http://freakonomics.com/podcast/uber-economists-dream/ http://freakonomics.com/podcast/uber-economists-dream/
  - feral 7y ago
    >first comprehensive Supply/Demand curve in the wild That's a huge claim. Anyone doing dynamic price optimization is doing this, long before 2016.
    - Darkphibre 7y ago
      Well, the guy has written textbooks on economics, you can take it up with him. :) From the interview: LEVITT: The very first class you take when you go and enroll in economics — introductory economics — typically on the very first day they put a demand curve on the board. And like every other economics student, when I showed up my freshman year in school and saw that demand curve, I just accepted it. I said, “Well, they put it on the board; it must be real.” And I never questioned anything about demand curves. I always just thought of demand curves as something that exists, like buildings or trees. They have a sort of a physicality to them. But then when I went to write my own textbook with Austan Goolsbee and Chad Syverson — now this is before Freakonomics, so maybe 13-15 years ago — I actually had to sit down and write about demand curves. And I thought for the first time, “what really is a demand curve?” And I thought to really bring it to life, I think I have to find one, I have to show one to the students. And I looked around, and I realized that nobody ever had really actually estimated a demand curve. Obviously, we know what they are. We know how to put them on a board, but I literally could not find a good example where we could put it in a box in our textbook to say, “This is what a demand curve really looks like in the real world,” because someone went out and found it. DUBNER: So you’re saying that the demand curve as it exists in economics and economic literature is kind of a fiction or an invention of economists to explain the rest of the transactions around it? LEVITT: Exactly. It’s an artificial construct, which turns out to be incredibly valuable for organizing the world and knowing how to analyze problems. And in that sense, who really needs to see one or to find one? But I’m a very tangible person, and I thought, if I could really have an example of a demand curve maybe I could push up the learning of the students. It took me, I don’t know, 15 years between when I took the beginning economics to when I wrote the textbook to actually think hard enough about demand curves to really understand them. I thought if I could show someone a real demand curve, I might help the students learn about it much faster. ... LEVITT: Yeah, so we aren’t faking it. I think that’s the wrong way to think about it. What I’d really say is that we completely and totally understand what a demand curve is, but we’ve never seen one. I don’t know if it’s fair to make physics comparisons, but you can imagine something like in the old days when the models had figured out something about protons and electrons, but we hadn’t actually figured out how to literally see an electron. And we knew it had to be there from the theory and then it was just a matter of making the colliders go fast enough or whatever it takes to see an electron, and then it was confirmed that they were there. So, in economics, it’s even easier because it’s not that we have to wonder whether demand curves exist or not, because we know they exist because we define them and they’re there. But I wanted to touch one; I wanted to hold a demand curve, and I had never had a chance to do that until I took Uber and it suddenly occurred to me that here was a chance to hold a demand curve in my own hand.
gnicholas 7y ago
> I can tell you that nothing we have ever done at Fog Creek has increased our revenue more than releasing a new version with more features. Nothing. The flow to our bottom line from new versions with new features is absolutely undeniable. It's like gravity. When we tried Google ads, when we implemented various affiliate schemes, or when an article about FogBugz appears in the press, we could barely see the effect on the bottom line For early-stage startups that are not well-known, press can definitely have a bigger impact than more features. For me, coverage in The Atlantic led to an interview on NPR, which led to tons new customers and a long-term benefit of being able to say we’d been covered by these two outlets. It helped with customer acquisition and award competitions, and would undoubtedly help with fundraising as well. 1: http://www.theatlantic.com/technology/archive/2016/05/a-better-way-to-read/482127/ http://www.theatlantic.com/technology/archive/2016/05/a-bett... 2: http://thetakeaway.org/story/eureka-moment-makes-reading-easier/ http://thetakeaway.org/story/eureka-moment-makes-reading-eas...
- hermitcrab 7y ago
  >I can tell you that nothing we have ever done at Fog Creek has increased our revenue more than releasing a new version with more features. That may be true for Joe Spolsky. But he is one of the highest profile software people in the world. The 99.9999% of us who are less famous should probably spend more time on marketing.
  - domador 7y ago
    You are likely right. Yet I wonder if a) Fog Creek had that high a profile when they put that advice into practice, and if not... b) The people that Fog Creek had such a high profile among included its prospective/repeat customers (as opposed to just non-customer fellow software developers.)
    - hermitcrab 7y ago
      a) Yes. Joel had a very well written blog that was very popular with developers (I miss your blog Joel!). b) Yes. Back then his customers were developers.
jmarbach 7y ago
This is a terrific guide overall and even provides guidance to develop your software pricing strategy beyond one common pitfall: assuming that you must charge one static price for all customers of your software. In reality, different segments of your users have varying price sensitivities, which means the best practice is to charge the maximum price that each individual customer segment is willing to pay. Skip to the section on "Versioning" to read more about this. Disclaimer: I run an API that helps businesses carry out versioning/dynamic pricing, https://modernpricing.com https://modernpricing.com
- pier25 7y ago
  So is your pricing dynamic too?
  - jmarbach 7y ago
    Yes, currently the pricing for each successful score changes by volume. $0.002 per score while under 1M scores per month, then $0.001 per score for scores beyond 1M per month.
    - kossae 7y ago
      Isn’t that just volume/tiered pricing?
      - jmarbach 7y ago
        Yup! Volume-based pricing is a simplistic way of charging different prices for different customer segments.
        pier25 7y ago
        So you’re not using your service to price your product?
        dx034 7y ago
tgsovlerkhgsel 7y ago
If you're making small utility software, the "friction" aspect becomes extremely important, on BOTH sides. I wrote a small tool that simplifies a single yet extremely annoying task (because I got sick of performing the task manually). I offered it free for personal use, with clear notices that you need to pay to use it at work, and a way to contact me for a business license. I sold one license. Several other users e-mailed me to thank me for the useful tool, including some who indicated they were using the tool at work. I could have added more aggressive nagging, or stringent enforcement (e.g. some form of online activation that blocks you if you're coming from a known corporate IP). I could also have decided to make the tool available 100% for free under an open-source license. The lessons I learned from this were: - if you offer a free-for-personal-use version, business users will only pay if the hassle of going through the payment process is lower than the hassle of using the free version illegally; I suspect a nag screen will only be enough if it's really frequent, and will probably annoy your "free" users a lot. - the effort required to write any form of license enforcement, or to set up and maintain easy ways for someone to pay for your software (e.g. credit card) is often not worth it --> If it's a small thing, do the world a favor, and just make it free. The money you'll earn may not be worth the additional time and hassle you'll have to put in to earn it (not just for the additional code or sales setup, but also dealing with payments and customer inquiries, taxes/legal stuff, ...).
- user5994461 7y ago
  Companies will only pay if they're forced to pay and are aware that they have to pay in the first place. That means you better have a nagging screen and better make it very clear that commercial usage requires a paid license. For desktop software, I'd suggest to detect if the system has a proxy configured, that's a good hint whether it's a corporate computer.
  - texasbigdata 7y ago
    Is true? Can you just run unlicensed tools at your work?
    - 7y ago
manishsharan 7y ago
A few years ago , I had read a blog on a competitive pricing model told from the perspective of a drug dealer. It was amusing and also chock full of mathematical logic applied to competitive pricing. I haven't been able to find that article since then. Does anyone have a link to that blog?

488 points by MatthewBF 7y ago

MatthewBF 7y ago

A helpful guide by Neil Davidson on how to develop a revenue model for your software business.

dang 7y ago

I remember this as having had prominent discussions on HN in the past, but I searched and can't find them. Anyone?

kick 7y ago
Looked for a few minutes. My best guess is that if there was one, it was probably submit under a different link with an editorialized title. On Red Gate's site alone, there's at least a few copies, along with the one on Davidson's site and the other copy that used to be on his site.
- deleted 7y ago
  [deleted]
- MattHilbert 7y ago
  Hi - the book is freely available from Neil Davidson's personal website at: https://neildavidson.com/downloads/dont-just-roll-the-dice-2.0.0.pdf https://neildavidson.com/downloads/dont-just-roll-the-dice-2... And from the Redgate Software website at: https://www.red-gate.com/library/dont-just-roll-the-dice https://www.red-gate.com/library/dont-just-roll-the-dice Hope that helps.

damir 7y ago

Wow, thanks for this PDF. Can't believe this is freely available... IMO they could easily charge for this and I'd gladly pay...

Arkanosis 7y ago
I'd be glad to pay now that I've enjoyed reading it… but I'd almost certainly not have read it if I had had to pay first. I like the approach taken (among others) by Matthew Butterick for Practical Typography [1]: I've enjoyed reading his book the same way and gladly paid for it /after/, as he asks, even though I would not have bought it at first. [1] https://practicaltypography.com/ https://practicaltypography.com/
hermitcrab 7y ago
I think the author made enough money off co-founding Redgate Software that he probably doesn't need a few dollars off you. I read it when it first came out. Its very good. Pricing is a surprisingly interesting and deep subject that is heavily intertwined with microeconomics and psychology.

ya3ad 7y ago

Thanks :-)

mojuba 7y ago

This article I think comes very close but never answers the central question here: how to find the price that generates maximum revenue. I have a hypothesis that price tolerance follows Pareto distribution, i.e. the function of the number of people willing to pay any given price for the same product must have the same shape as the overall wealth distribution among your customers. Therefore it should be theoretically possible to find your peak price that yields maximum revenue in the following three steps: (1) take measurements at several different price points (A/B test) (2) find the Pareto parameters for your customers (3) solve the differential and find the peak. The same in a bit more detail: https://medium.com/@hovm/finding-the-max-revenue-price-mark-for-digital-products-24cef24f746d https://medium.com/@hovm/finding-the-max-revenue-price-mark-...

Darkphibre 7y ago
Reminds me of the articles that came out in 2016, where we --finally saw the first comprehensive Supply/Demand curve in the wild: http://freakonomics.com/podcast/uber-economists-dream/ http://freakonomics.com/podcast/uber-economists-dream/
- feral 7y ago
  >first comprehensive Supply/Demand curve in the wild That's a huge claim. Anyone doing dynamic price optimization is doing this, long before 2016.
  - Darkphibre 7y ago
    Well, the guy has written textbooks on economics, you can take it up with him. :) From the interview: LEVITT: The very first class you take when you go and enroll in economics — introductory economics — typically on the very first day they put a demand curve on the board. And like every other economics student, when I showed up my freshman year in school and saw that demand curve, I just accepted it. I said, “Well, they put it on the board; it must be real.” And I never questioned anything about demand curves. I always just thought of demand curves as something that exists, like buildings or trees. They have a sort of a physicality to them. But then when I went to write my own textbook with Austan Goolsbee and Chad Syverson — now this is before Freakonomics, so maybe 13-15 years ago — I actually had to sit down and write about demand curves. And I thought for the first time, “what really is a demand curve?” And I thought to really bring it to life, I think I have to find one, I have to show one to the students. And I looked around, and I realized that nobody ever had really actually estimated a demand curve. Obviously, we know what they are. We know how to put them on a board, but I literally could not find a good example where we could put it in a box in our textbook to say, “This is what a demand curve really looks like in the real world,” because someone went out and found it. DUBNER: So you’re saying that the demand curve as it exists in economics and economic literature is kind of a fiction or an invention of economists to explain the rest of the transactions around it? LEVITT: Exactly. It’s an artificial construct, which turns out to be incredibly valuable for organizing the world and knowing how to analyze problems. And in that sense, who really needs to see one or to find one? But I’m a very tangible person, and I thought, if I could really have an example of a demand curve maybe I could push up the learning of the students. It took me, I don’t know, 15 years between when I took the beginning economics to when I wrote the textbook to actually think hard enough about demand curves to really understand them. I thought if I could show someone a real demand curve, I might help the students learn about it much faster. ... LEVITT: Yeah, so we aren’t faking it. I think that’s the wrong way to think about it. What I’d really say is that we completely and totally understand what a demand curve is, but we’ve never seen one. I don’t know if it’s fair to make physics comparisons, but you can imagine something like in the old days when the models had figured out something about protons and electrons, but we hadn’t actually figured out how to literally see an electron. And we knew it had to be there from the theory and then it was just a matter of making the colliders go fast enough or whatever it takes to see an electron, and then it was confirmed that they were there. So, in economics, it’s even easier because it’s not that we have to wonder whether demand curves exist or not, because we know they exist because we define them and they’re there. But I wanted to touch one; I wanted to hold a demand curve, and I had never had a chance to do that until I took Uber and it suddenly occurred to me that here was a chance to hold a demand curve in my own hand.

gnicholas 7y ago

> I can tell you that nothing we have ever done at Fog Creek has increased our revenue more than releasing a new version with more features. Nothing. The flow to our bottom line from new versions with new features is absolutely undeniable. It's like gravity. When we tried Google ads, when we implemented various affiliate schemes, or when an article about FogBugz appears in the press, we could barely see the effect on the bottom line For early-stage startups that are not well-known, press can definitely have a bigger impact than more features. For me, coverage in The Atlantic led to an interview on NPR, which led to tons new customers and a long-term benefit of being able to say we’d been covered by these two outlets. It helped with customer acquisition and award competitions, and would undoubtedly help with fundraising as well. 1: http://www.theatlantic.com/technology/archive/2016/05/a-better-way-to-read/482127/ http://www.theatlantic.com/technology/archive/2016/05/a-bett... 2: http://thetakeaway.org/story/eureka-moment-makes-reading-easier/ http://thetakeaway.org/story/eureka-moment-makes-reading-eas...

hermitcrab 7y ago
>I can tell you that nothing we have ever done at Fog Creek has increased our revenue more than releasing a new version with more features. That may be true for Joe Spolsky. But he is one of the highest profile software people in the world. The 99.9999% of us who are less famous should probably spend more time on marketing.
- domador 7y ago
  You are likely right. Yet I wonder if a) Fog Creek had that high a profile when they put that advice into practice, and if not... b) The people that Fog Creek had such a high profile among included its prospective/repeat customers (as opposed to just non-customer fellow software developers.)
  - hermitcrab 7y ago
    a) Yes. Joel had a very well written blog that was very popular with developers (I miss your blog Joel!). b) Yes. Back then his customers were developers.

jmarbach 7y ago

This is a terrific guide overall and even provides guidance to develop your software pricing strategy beyond one common pitfall: assuming that you must charge one static price for all customers of your software. In reality, different segments of your users have varying price sensitivities, which means the best practice is to charge the maximum price that each individual customer segment is willing to pay. Skip to the section on "Versioning" to read more about this. Disclaimer: I run an API that helps businesses carry out versioning/dynamic pricing, https://modernpricing.com https://modernpricing.com

pier25 7y ago
So is your pricing dynamic too?
- jmarbach 7y ago
  Yes, currently the pricing for each successful score changes by volume. $0.002 per score while under 1M scores per month, then $0.001 per score for scores beyond 1M per month.
  - kossae 7y ago
    Isn’t that just volume/tiered pricing?
    - jmarbach 7y ago
      Yup! Volume-based pricing is a simplistic way of charging different prices for different customer segments.
      - pier25 7y ago
        So you’re not using your service to price your product?
        dx034 7y ago

tgsovlerkhgsel 7y ago

If you're making small utility software, the "friction" aspect becomes extremely important, on BOTH sides. I wrote a small tool that simplifies a single yet extremely annoying task (because I got sick of performing the task manually). I offered it free for personal use, with clear notices that you need to pay to use it at work, and a way to contact me for a business license. I sold one license. Several other users e-mailed me to thank me for the useful tool, including some who indicated they were using the tool at work. I could have added more aggressive nagging, or stringent enforcement (e.g. some form of online activation that blocks you if you're coming from a known corporate IP). I could also have decided to make the tool available 100% for free under an open-source license. The lessons I learned from this were: - if you offer a free-for-personal-use version, business users will only pay if the hassle of going through the payment process is lower than the hassle of using the free version illegally; I suspect a nag screen will only be enough if it's really frequent, and will probably annoy your "free" users a lot. - the effort required to write any form of license enforcement, or to set up and maintain easy ways for someone to pay for your software (e.g. credit card) is often not worth it --> If it's a small thing, do the world a favor, and just make it free. The money you'll earn may not be worth the additional time and hassle you'll have to put in to earn it (not just for the additional code or sales setup, but also dealing with payments and customer inquiries, taxes/legal stuff, ...).

user5994461 7y ago
Companies will only pay if they're forced to pay and are aware that they have to pay in the first place. That means you better have a nagging screen and better make it very clear that commercial usage requires a paid license. For desktop software, I'd suggest to detect if the system has a proxy configured, that's a good hint whether it's a corporate computer.
- texasbigdata 7y ago
  Is true? Can you just run unlicensed tools at your work?
  - 7y ago

manishsharan 7y ago

A few years ago , I had read a blog on a competitive pricing model told from the perspective of a drug dealer. It was amusing and also chock full of mathematical logic applied to competitive pricing. I haven't been able to find that article since then. Does anyone have a link to that blog?