From: mcgregor@netcom.com (Scott L. McGregor)
Subject: Re:  Solid Value, Rulers, and Copy Protection (long)
Reply-To: mcgregor@netcom.com
Organization: Atherton Technology, Inc.
Date: Wed, 12 Aug 1992 17:35:46 GMT

In article <1992Aug12.015856.13142@fsg.com> chuck@fsg.com (Chuck Yerkes)  
writes:
 
>   The big problem I see with large applications in general is that it
> is often absurdly priced.  Companies can (and do) afford $500 per
> package for 4-5 packages.  This just isn't possible for (1) smaller
> companies and (2) individuals.  It's obvious, in many case, that it`s
> an artificial pricing structure that does not work and encourages
> (perhaps too strong a word) piracy...

>    Prices must reflect the VALUE of the software to the consumer.  When
> software costs more than a month's rent in an apartment (or 75% here in
> New York), people hesitate, especially when they have to do that 3
> times or more.  When it costs 1/5 that, depending on the software, I'd
> say that they "cost" of pirating (no support, no manuals, no upgrades,
> etc) will drop significantly.  The only time prices seem to come down
> is when there is competition from a MAJOR player.  Laws and prosecution
> won't stop much.  The courts and jails are stuffed with people who are
> more dangerous to our society that a guy dup'ing a disk for his home
> computers.

I think that the basis of this debate is the difference in perspective of the  
company and of individuals. A lot has been said about how it appears from the  
individual side, but perhaps it may be useful to also look at it from the  
company's side.

Many company's have either private or venture financing.  These funds were  
acquired with the explicit goal of achieving a certain return on the  
investments.  For instance, a goal of $20+ Million in annual revenue is common,  
since below this amount it is difficult for the stock to go public and for the  
investors to recoup their investment through the sale of their stock.

(The point about investor expectations is important to note, because at many VC  
and privately funded companies the founders hold very little of the stock and  
don't have control any more. It's not just enough for them to "make enough to  
pay their rent". They have to meet the investor's goals or they will be  
replaced by someone else who will make them more central. Remember, companies  
are only individuals in the legal fiction sense.  It is not a faceless company  
that is greedy, it is the investors who put their money in that are.  And if  
you have ever put your money in a variable rate bank account, money fund or  
mutual fund--and later pulled it out because the return was lower than you  
expected, then you are acting just the way investors who fund these companies  
do).

Now consider what this means in a large market (like the PC market) vs. a small  
market (like the NeXT market).  There  over 10 Million copies of MS Windows  
were sold last year. So, if you write an application such as a check book  
program like Quicken, and you sell it on Windows Platforms, you can sell it for  
$20 each and still meet your $20M goal, even if you only sell to 10% of that  
market.

Now consider the NeXT market: there are about 50K systems out there now.   
Probably some of those are used for academic or corporation use only, but lets  
assume they aren't and that EVERYONE would buy the checkbook program.  How much  
would it have to cost for the company to meet their $20M goal?  With a little  
mathematics we find that it is $400.  And had we assumed only the same 10%  
penetration rate we would have got $4000. 

Now from the customer's perspective, it is check book balancing is relatively  
the same benefit whether done manually by an accountant, done on a NeXT, or  
done by Quicken under windows. So from the customer's standpoint the price  
"ought" to be the same.  When it isn't, especially when it is significantly  
higher priced the customer may be mystified, or worse frustrated.  The customer  
sees that if the prices were more "in line" they would be more willing to buy  
and the company would make more sales.  But the customer doesn't see that the  
total revenue might decline faster than the unit volume props it up.  At a  
$400/copy there might be many people who still would not buy it and that would  
undermine the company's (and their investor's) goals.  But there might well be  
a set of very wealthy, relatively price insensitive customers who would pay the  
$4000 willingly for the convenience of not buying a PC. And those customers  
alone (if say they were 10% or the market) might help the company meet its  
magic $20M goal.  But dropping the price to $400 might only get twice as many  
more customers even though it cut unit price by a factor of 10.  

Also, unfortunately, if you offer your checkbook program on NeXT at $20, not  
only will you be limited to making only $2M tops (10% of the goal mentioned  
above), but that matching price on NeXT and similar functionality is not likely  
to be enough draw by itself to cause NeXT sales to climb to 10 Million  
overnight. This reality can lead to less investment (and consequent less  
choice) in niche markets like NeXT.  It can also mean the companies that are  
there are smaller and have smaller sales expectations, and less ability to  
support and distribute compared to their mass market bretheren.  I think you  
can see this is in fact true of the NeXT market where smaller companies like  
Lighthouse Design and RightBrain are more common than companies like Microsoft  
and Borland.

This is the pricing/ROI dilemna that company's face in small niche markets. It  
would be great if companies could find some way to segment their product sales  
the way airlines do, offering higher priced "seats" to business and wealthier  
individuals, while offering lower priced "seats" to individuals and students.   
I've seen a few effort here to offer such separate pricing schemes for  
software, but in general it is hard to keep the all the higher priced sales  
from migrating to the lower priced copies, undermining the multi-tier pricing  
strategy.  

Of course, the actual situation is even more complex and messy than this.  But,  
if you want to understand why companies act the way they do, it is useful to  
put yourself in their shoes for a bit.  Once you see it from their perspective,  
you may be able to suggest alternatives that help them meet their goals as well  
as your own.

Scott McGregor
Newsgroups: comp.sys.next.software