The technical team or the product development team has come up with a ground breaking product. The technology can have a deep impact on the customer. The technical team knows it, and so does the customer. The contract for a long term engagement is about to hit off, and then the customer asks how much will this technology cost his pockets? In this competitive world, the technology developers do want the best price for the technology, but at the same time, they really do not know what the best price is to which your customer will give the green signal for a long term engagement. So how does one price an IT product?

Since IT products are  intangible, it has been recognized that the best price for intangible products should never be determined by production costs. Cost can be the “floor” of pricing alternatives and the customer’s quantified benefit in monetary terms should be the “ceiling.” The best price lies somewhere in between and that should be based upon the value of the technology to the customer.

This pricing can be done in the following steps:

  1. Decide the various unique benefits from your product, such that there is no overlap.
  2. Quantify the objective of deliverables for each benefit, by discussing the same with your client.
  3. Map each benefit to its monetary value from the client’s data (or industry average).
  4. Ask the client how much percentage deviation is acceptable from the quantified objective of deliverables mentioned earlier.
  5. Discount the monetary value of each objective with the deviation percentage.
  6. Sum up the discounted benefits.
  7. Discount that sum by the operating profit margin of your client, and quote the calculated price.

The major point of debate for any firm, when it decides to go for an investment, is what would be the return on its investment, as the ROI figures are what often drive investment decisions. This methodology helps the client deduct the exact ROI from his investment.

Read the linked paper to know more about how you can implement value based pricing.

To know more about the process by which an IT firm may use the mentioned pricing strategy, download and read the following paper.
This paper is a must read for product development managers in IT product companies. This paper has recorded as one of the top 10 downloaded papers of SSRN.

Did you read our article on the various pricing strategies used to price information technology products and service engagements?

By Kar

Dr. Kar works in the interface of digital transformation and data science. Professionally a professor in one of the top B-Schools of Asia and an alumni of XLRI, he has extensive experience in teaching, training, consultancy and research in reputed institutes. He is a regular contributor of Business Fundas and a frequent author in research platforms. He is widely cited as a researcher. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.