Pricing dilemma

A year back I was involved with a leading mobile apps company on an issue related to product pricing. The company developed customized mobile apps for business. At the time it had a staff of 20 programmers and reasonably successful – having on its customer list several top global corporations like cola companies, few leading banks, advertising giants and others. It had revenues close to USD 1 million. The company had identified 20+ software functions (routines) that were commonly used in most mobile apps. They had put these together into a single library that programmers could access from a central repository when working on a mobile app project. Examples of such routines included memory management, real-time authentication, camera control, text messaging within the app and so on. Use of this central repository of frequently used routines had resulted in 30% saving in programmer time, standardization and uniform quality across projects, shorter time to market and finally the monetary benefit.

The company saw a window of opportunity externally. They knew the mobile app business was growing at a fast clip with app vendors mushrooming all over. They were also aware of the trend of end customers developing mission critical apps internally. Both these customer segments would see a value proposition in the library if the company offered it. The company was at a critical point – thinking how to breach the psychological revenue barrier of USD 1 million. It faced fierce competition that had brought down margins from 80% to 25% in just two years. They thought the library was a ticket to new profit stream and improved competitive position. They were debating how to price and market the product.

However this meant a sea-change in the way the company thought and worked. So far, they delivered single project as per known customer requirements to a single known customer at fixed price. They did their best to deliver within time and budget. They priced their services at cost plus margin. Any delay ate into their margin. Selling the tool externally would involve selling a generic product to external customers whose size and number was unknown and uncertain. They had a hunch but did not know for sure the external customers would really see value in the offering. For example a tribe of software programmers take pride in and get thrill from solving tough problems. They would not care for such a product. A few team members even felt that their competitors would also acquire the library thus diluting company’s competitive advantage in the market.

The company sought answers to several questions:

1. Should they sell the library externally at all?
2. Should they price it on cost plus basis or some other method e.g., value based pricing?
3. What should be the list price of the product?
4. What should be the license structure i.e., kind of licenses they should offer?

The company made a set of decisions. I will share those in the next post. Meanwhile, I invite you to share your suggestions on the questions facing the company.