Software Pricing Factors and Strategies, Exercises of Software Project Management

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SOFTWARE PRICING

 Estimates are made to discover the cost, to the

developer, of producing a software system.

 You take into account, hardware, software, travel, training

and effort costs.

 There is not a simple relationship between the

development cost and the price charged to the

customer.

 Broader organisational, economic, political and

business considerations influence the price

charged.

Software Pricing

Factor Description

Requirements

volatility

If the requirements are likely to change, an

organization may lower its price to win a contract.

After the contract is awarded, high prices can be

charged for changes to the requirements.

Financial health Developers in financial difficulty may lower their

price to gain a contract. It is better to make a

smaller than normal profit or break even than to

go out of business. Cash flow is more important

than profit in difficult economic times.

Factors Affecting software

pricing Cont...

 ‘pricing to win’ is a commonly used strategy. Pricing to win means that a company has

some idea of the price that the customer expects to pay and makes a bid for the

contract based on the customer’s expected price.

 A project cost is agreed on the basis of an outline proposal. Negotiations then take

place between client and customer to establish the detailed project specification. This

specification is constrained by the agreed cost. The buyer and seller must agree on

what is acceptable system functionality. The fixed factor in many projects is not the

project requirements but the cost. The requirements may be changed so that the cost

is not exceeded.

For example, say a company (OilSoft) is bidding for a contract to develop a fuel delivery system

for an oil company that schedules deliveries of fuel to its service sta- tions. There is no detailed

requirements document for this system, so OilSoft estimates that a price of $900,000 is likely to

be competitive and within the oil com- pany’s budget. After they are granted the contract,

OilSoft then negotiates the detailed requirements of the system so that basic functionality is

delivered. They then estimate the additional costs for other requirements. The oil company

does not necessarily lose here because it has awarded the contract to a company that it can

trust. The additional requirements may be funded from a future budget, so that the oil

company’s budgeting is not disrupted by a high initial software cost.

Pricing to Win