I used to think that I was pretty good at pricing software products I created. I was forced to revise my high opinion of myself when a company bought the IP to a product I'd been selling and increased the price. By a factor of eight.
My first (good) experience in pricing software products came in the late nineties when I released a Java-COM bridging product called J-Integra. I figured I could sell it at US$75 a license, so I initially priced it at US$375 for a five client license pack.
Not long after first releasing it I went to visit Lehman Brothers in Manhattan, at the very bottom of the island. When they found out that the entire deployment, world-wide, of a solution based on J-Integra was going to cost them less than US$1K, they laughed. I cringed.
Instead of taking a taxi back to the mid-town area where I was staying, I walked. And I thought. By the time I got back I'd decided to change the licensing model. I kept the existing US$375 for 5 client licenses, but I added a server license at US$3000. I'd "segmented" my market -- depending on how J-Integra was being used, the client or the server license would apply.
No one complained about the price increase, although plenty of people complained about the price in general over the years. I came to realize that this was good. I realized that you want to have enough people complaining about the price so that you know it is not too low, and enough sales so that you know it is not too high.
So how did I end up charging eight times less than the market would bear, when I sold my next product, an SQL Intellisense tool called PromptSQL, for US$25 a copy?
I have plenty of excuses: PromptSQL was a "hobby" product that I created it on the train going to and from my day job as a consultant. One of my friends thought that US$25 a copy was ridiculously high.
The reality is that the US$25 price was OK as an initial "best guess" as to what was appropriate. The mistake I made was in not changing the pricing once it was clear that it was too low. The signs were there -- indeed one of the reviews said At just $25 for a single copy, this utility provides value which far exceeds its rather modest cost. That is a pretty clear hint!
Of course it isn't as clear cut as that. Red-Gate (the company that acquired PromptSQL from me) actually released the version that I'd been selling, for free, while they wrote a new version from scratch. I tell myself that Red-Gate has serious credibility in the market, and they invested a lot in creating a slick new version, and that is why they can charge so much more that I did. And its partly true. But I am sure I could at least have charged US$75 a copy. Ouch.