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I know about how the economies of scale work, and how a bigger competitor could beat you in price, if they wanted. But there doesn't seem to be anything better to compete at when entering a market in software (without being dishonest); a new product often won't be as good as an established one as far as features go. Plus, older popular products are usually priced higher just "because they can," and it's not likely they'll change just to crush a smaller company, so it seems tempting just to set a low price.

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If your product costs less, but doesn't have the same features are you really beating them on price? There is a relationship between price and people's perception of quality (and it's usually accurate). "I was going to buy a BMW, but the price on that Chevy..."

The old saying, "No one ever got fired for buying IBM." wasn't because it was the cheapest.

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a new product obviously won't be as good as an established one as far as features go

Why's that? Old products are often encumbered by legacy code, backwards compatibility, and high expectations. New products can take bold new directions, try new ideas, and make fundamental leaps that existing software never could.

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good point although I suppose I could change "obviously" to "often" and it'd still be a valid question –  eds Sep 2 '10 at 3:28
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+1 Why are you entering the market if you're not better than the existing options in at least some key ways? –  grossvogel Oct 15 '10 at 0:25
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Two words: Open Source. (EDIT: and, of course, other free software, as noted in Mark's comment.)

Unless you're doing something super-specialized or incredibly complicated, someone's going to make a product that does what yours does, and give it away for free. And you can't beat free.

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Open source really isn't related to the point about free. Most of Google's products, for example, are free but are not open source, and open source does not preclude the ability to sell the product. –  user8 Sep 2 '10 at 3:24
    
@Mark Trapp Free as in freedom. –  alternative Oct 13 '10 at 23:13
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@matthepic the answer says "...give it away for free." "Free as in freedom" doesn't make any sense in this context, especially when the question is about price, not freedom. –  user8 Oct 13 '10 at 23:17
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Older (more mature) products tend to command a premium not merely "because they can", but because they solve an already proven need. It's not much different than the salary difference between an entry-level programmer and a 20-year-veteran: the former has higher risk, so the initial investment needs to be lower.

But don't underestimate the economics of cheap or free. Google is the software exemplar of this, but it's worked amazingly well in other industries. Gillette is one of the original pioneers: give away the razor and make money on the blades. Printer manufacturers do the same thing with ink cartridges.

To answer the titular question though: you don't want to compete on price because it's a known, negotiable quantity. Either your competitors will undercut you, or your clients/customers will undervalue you. If you say your product is $50, you competitor can say "I'll give you the same thing for $45" or your client can ask, "Why isn't it $45?"

Instead, it's much more important to compete on value: it's okay if your product costs a little more than a competitor's: your product is better. To this end, perfect case study in selling on value is Apple: their products may cost more, they may sell less volume, but they absolutely kill their competitors in profit margins.

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I'm curious where you got the notion that new products shouldnt compete on price. Of course they should. Unlike, say, auto manufacturers, smaller software companies often have lower overhead and can produce software less expensively than a larger company can. Consider for example the effort involved in getting a project green lit at, say, Oracle. If you can produce a competitive product, and are able to offer it at a price your competitor cant meet, go for it!

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Sell your products for what they are worth to your customer. It's not my fault the competition can't control their costs. "Sorry folks, raising prices because we all got company cars." –  JeffO Feb 9 '11 at 15:51
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Competing on price always ends in fail. You are, in essence, commoditizing the product(s). It makes sense if your money maker isn't the product itself, but if it is... then it's a terrible idea.

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This came up at a conference recently. The problems with competing on price:

  • there's always someone who lives in a cheaper economy and is willing to get paid less than you
  • there's often someone who will open source a competing product, at which point the price war has just gone nuclear, and you're on the wrong end of the ICBM
  • market perception of your product will be that it has little value
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+1 for the nuclear price war –  Alan Pearce Oct 25 '10 at 9:21
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