If you read Tekedia regularly, you would have noticed that I am extremely fixated with cost. There is no week I do not think about marginal cost because that is the most important cost element in any modern digital business. It makes it possible to have scalable advantage. The business model of freemium product is largely anchored on that: if marginal cost is near zero, you can get many customers quickly especially if you allow the pricing to tend near-zero [free].
But knowing that growth is important is certainly obvious, for every founder. The challenge is executing the growth strategy. Companies like Google and Facebook which can acquire customers at ease, even at low or zero costs, have huge scalable advantages. It means they can scale without much burdens, financially.
But besides this, one of the finest pricing inventions of all time is licensing. You buy something and typically yearly you must send money to the maker to have legal rights to use that product. When Henry Ford built his cars, he did not think about that. But Bill Gates and others did just that. It is irrelevant that cars are “hardware” while software is what it is.
Today’s Tesla is as software as it could become. But when you buy one, you never have to keep paying annual license to have rights to use your car even though they send software updates and patches when necessary. But do same on Oracle and Windows as an enterprise client and stop paying for license. You would be in trouble – the Police will come and ransack your property for using the software illegally. That would be happening as Tesla is parked by the side of the office. For the vehicle, no one would ask you to pay any license fee on it for the perpetual usage rights. You paid and got 100% rights. In software, you paid and got intermittent rights but never in perpetuity.
Smart pricing is the innovation which has transformed software over hardware business. No matter what happens, revenue would always come next year even if the client is not using the software. Provided it has not been decommissioned, money must be paid on it.
Around 1930s, hardware was a superior career path when compared with software. Then, women were relegated to software [discrimination in all phases]. The men had felt there was nothing there. The earliest computers built were actually supported by women coders. They never allowed women close to the hardware. Yes, the men reasoned that hardware was for men and the programming was the job made for women [men made tons of money, the women made largely nothing because software job then was like nothing big]. The best pay was in hardware. They made legends in them; from Shockley to Jack Kilby.
Then, by the time Bill Gates and Larry Ellison started engineering pricing, wealth flipped from hardware to software. Yes, they made great products but part of the success was the pricing innovation and the capacity to convince the world that software would be licensed.
By then, men saw software as being more promising [more money coming there]. They jumped ship and now command the sector, pushing women out. So, the software which women excelled and supported is now made to look harder, attracting more wages. We had all forgotten women were able to hold their levels many decades ago.
In this, you can see how the capacity to use pricing to earn massive income changed an industry. When you design, always think about pricing. It is one of the most important elements that could lead to success. Do not make pricing an after-thought. It must be part of the product design and evolution. It could be the most important innovation in your firm. There is no hardware that does not have software. Yet, the people that built hardware industry did not invent that ingenious pricing. Pricing will continue to change markets and companies. Pay attention to it.
That pricing was the reason software overtook hardware to become a more rewarding career [on average] and in the process moved men to hijack the sector back from women. In other words, software companies make more money, not just because of their products, but due to how they price them.