Well, yes, you can increase sales 10,000% that way. And profits, well, lets make it up on volume alright?

Lowering price will generate increase in sales, anyone will agree with that. Whether that will increase the profits is completely different question. And if you are in the businesses, then profits are what you are after, right?

Lowering price is not magic wand to increase profits. Yet, Jeff at Coding Horror is asking whether publishers are pricing software wrong, too high, and cites iPhone app store which sells lot of software at about $5 and example of the game Left 4 Dead where they through discounts increased sales 3000%. His argument is that if software were priced low enough, it would pass “why not” threshold and people will buy without inhibition.

There is that, and there is profitability. Lowering price too much is like putting yourself on diet with insufficient calories to support the body. The end result is terminal.

I think that his logic is wrong and is influenced by looking into games, which are type of the software that has little ongoing cost after initial sunk cost for development, and are time sensitive. Let me explain that before covering how these things influence pricing. It is not that low price generated sales and potential profits, rather it is smart pricing strategy, which is really nothing new.

By little ongoing cost I mean that the games don’t have dedicated support personnel or developers working on improving the game year around. Once it is done, it is done. Some bug fixes are made, but that is it. You can play with the price after release as much as you want, because development is sunk cost:

In traditional microeconomic theory, only variable costs are relevant to a decision. Traditional economics proposes that an economic actor does not let sunk costs influence one’s decisions, because doing so would not be rationally assessing a decision exclusively on its own merits.

Contrast that with business applications which need and are expected to provide ongoing support and make constants improvements to the products. This is ongoing and variable cost that is there if you want to sell that product at all. Games don’t have that cost.

By time sensitive I mean that games have shelf life. They are hot week(s) after the release, but then new games come along and steal spotlight. They are entertainment, not a tool.

Both of these influence what you can do with pricing. In particular, the Left 4 Dead game example employs classic differential time sensitive pricing strategy. You will see many products carrying higher initial price to capitalize on customers that place high value on the item and are willing to pay more to be among firsts to own the item and have bragging rights. Over time then prices are dropped to sell to more price sensitive customers. It is done to capture all segments and maximize profits.

For example initial iPhone was $499 and price was dropped 2 months after release to $299. Today it is sold for $199. Time successfully indentified people that are valuing the product more and allowed Apple to maximize profits from latest gadget.

The fashion industry uses same approach where you pay more for latest styles so prices are high at the beginning of the season. Same for the books. New hard-cover releases are 2, 3 or even 4 times more expensive than later released paperback versions.

I would argue that iPhone applications are in the same low ongoing cost boat. I doubt they provide much ongoing support and lot of them are entertainment apps. Event if they do have ongoing cost the low price will be the undoing. Most of iPhone apps are not really profitable so low pricing is hurting them big time.

Low pricing is a tool, not magic wand…