20 Mar 2013

Pricing a Product: Napkin Math

I’m facing the novel prospect of pricing a software product. This product is something that I created during evenings and weekends. It’s very specialized for my current industry, so I won’t go into the details of the product. But suffice to say that it sorts data in a time saving way.

Product Benefits

  • Saves 1 to 10 + hours per assignment
  • Each hour saved is worth ~ $30 +
  • Each team member has their own assignment
  • 5 to 10 assignments submitted each week
  • Concept can be applied for other divisions, requiring 60% retooling of the application.
  • Providing difficult to find answers which could avoid legal fees and fines ranging from $10,000 to $1,000,000 or more.

Product Costs

  • Developer’s time, my own = Approximately 240 hours.
  • Ongoing maintenance time = 0.5 hr / wk.
  • Monthly hosting cost = Variable based on capacity but definately < $50 / month
  • Equipment, utilities, etc during development = Not factored into estimates.

Additional Factors

  • Charging for the creativity that provided the impetus.
  • Specialized industry knowledge = Priceless :)

What’s my thought process?

My first thought was to give it away as a way to parlay into a different technical role in my organization. Like a good dealer, the first custom software taste is free, but the rest will “cost ya”. Given further information about pricing dynamics and company response to innovation, this is not seeming to be as appealing a prospect as previously thought.

Cost based pricing

Charge a sum based on the hours invested plus a bit of padding. This is the natural method that comes to mind when I consider pricing. According to RubyFreelancer Podcast, this is the Retail method of pricing. They also explain at length that this is a shortsighted method of pricing a product. The short explanation is that this ties your income to an hourly wage. One can certainly make a solid income off of these numbers. But it’s difficult to transform a product into residual income or a grand success.


240 hrs * $150 / hr = $36,000

Naive Pricing

Price the product at an arbitrary value, such as $5,000. This one is also tempting. This approach seems to reflect ‘Imposter Syndrome’. Pricing arbitrarily doesn’t tie the product’s price to the benefits and savings received by the purchasing organization. Based on the business books and sales books that I’ve read in the last year, this isn’t a likely method for sales success.

Value/Savings Based Pricing

Price the product so that purchaser saves money by using it. 10 assignments/wk * 2 hr savings/assignment * $30 savings/hr = $600/wk savings + Improved chance of avoiding legal fees + Providing more accurate information to company’s client, leading to increased client retention. (Would cost $12M+ to lose a client) = $50k to 100k Savings if my system is implemented beyond our regional office (ie statewide) = ~$6,000/wk on speeding up completion of assignments. This value doesn’t factor in avoiding legal fees or improved client retention.


My plan to learn more about business and sales is already changing the way that I approach the process of selling my product. I’m moving towards value based pricing and considering how to turn the product into a residual income stream. It’s a very exciting time! Note: Just for the record - I intend to retain Intellectual Property rights given that it’s my own work product in off-hours.