Sweetening the Deal
Volume Number: 20 (2004)
Issue Number: 2
Column Tag: Marketing
by Dave Wooldridge
Sweetening the Deal
Increasing Software Sales with Purchase Incentives
Last month, we explored ways to enhance your software demos and trialware in the hopes of turning more users into customers. While those various tactics should help increase sales, they certainly won't entice everyone. Not every person who downloads your software is going to want or need your product, but what about those holdouts who continue to use unregistered versions? After several sessions, they obviously have found your product to be useful or entertaining, or else it would have ended up in their trash bin long ago. These are the users who are definitely interested in your software, but have been reluctant to take the final purchase step. There are typically three reasons that might prevent a satisfied user from becoming a registered customer:
Ah, yes, the three P's preventing purchases (try repeating that tongue-twister multiple times). Developers may recognize these three subjects as contributing factors in the ongoing erosion of software sales. Since the three P's will probably always be part of the software landscape, programmers often turn a blind eye, thinking there is little they can do to battle these global problems. Sure, there will always be users who complain about your prices. And there's no way to prevent piracy (if hackers want to pirate or crack your software, they will find a way to do it). As for procrastination, don't we all try to avoid spending money unless absolutely necessary? The key is to change our perception of these problems. Instead of giving up the battle, try to find creative avenues to gain some ground. You may not win over all of those users, but you're sure to capture more sales than if you did nothing.
This month, we'll investigate methods to "sweeten the deal" for those satisfied - yet unregistered - users, with the goal of finding just the right incentive that finally motivates them to purchase a software license.
The price of your software is a good place to start. If your product has been well-received with good reviews and testimonials, but sales are still below reasonable expectations, you may question the price as a possible deterrent. The natural assumption is that the price may be too high, but you should also take into consideration that the price might be too low.
Too low? Is that even possible? Yes, price directly affects consumer perception of your software. Let's use a pastry shop as an example. A pastry shop decides to place their cinnamon rolls on sale for half price. Since they are normally priced at $2.00, people flock from all over town to buy them for the special sale price of $1.00. The shop owners are so pleased with the resulting profits (since each cinnamon roll only costs $0.10 to make) that they decide to drop the price even lower to $0.25, in the hopes of selling even more volume! To their surprise, sales sharply decline. No one wanted to buy a cinnamon roll for only a quarter. Why? Because the price was so cheap that people believed there had to be something wrong with the cinnamon rolls. When the price dipped below a reasonable level, the general assumption was that the cinnamon rolls were probably stale, "day-old" inventory.
Many shareware developers fall prey to under-estimating the value of their products. If the competition is selling a similar product for $39.95, don't sell your product for only $5.00. Placing one copy of your product on a web server as downloadable shareware removes the costly overhead of manufacturing a boxed retail CD-ROM package, so as developers, we often want to pass the savings onto the customer. Unfortunately, this kind of low-ball pricing strategy will not deliver a windfall of sales, but will instead create the perception that your product is not of the same professional quality as your competitor's. In the eyes of the consumer, price is directly related to quality, reinforced by the popular phrase "you get what you pay for." For $39.95, customers expect a quality product and support from your competitor. For only $5.00, the element of risk is introduced with your product. You may be seen as a hobbyist with an uncertain future instead of a stable, professional software company. Sure, it's only $5.00, so the risk is minimal, but that's $5.00 that could have been put toward the "safe" purchase of the competition's $39.95 product.
Beyond the fact that low-end pricing can create inaccurate consumer perceptions, it can also negatively affect the future of your business. If you're selling small utilities that only offer a single feature, then pricing these types of products under $10 may be appropriate, but for larger multi-featured applications, prices that fall below $10.00 can often prevent your business from growing. Managing customer support, sales inquires, product marketing, and programming takes time... and time equals money. If you're currently a one or two person shareware operation, you'll have to sell a dauntingly high number of $5.00 licenses to generate enough revenue to afford advertising or additional employees.
Doing the math presents a sobering view of your business projections. Say you want to purchase an online banner advertisement on a popular software site. The banner ad campaign (to advertise your $5.00 product) costs $600.00 per month. If you utilize an e-commerce partner (such as Kagi, eSellerate, RegNow, RegSoft, DigiBuy, Reg.Net, etc.) who subtracts a processing fee from every software sale (usually an average minimum of $1.00-$3.00 per transaction), then for the sake of this example, let's say $1.00 is the order processing fee. That means for every $5.00 sale, your business receives a net profit of $4.00. You would need to sell 150 software licenses in only one month just to break even from the $600.00 advertising expenditure! Raising your product's price to $15 or higher drastically reduces the number of licenses you need to sell to pay for the advertising. Even with a $2.00 order processing fee, a net profit of $13 requires you to only sell 47 licenses to break even. A $23.00 net profit ($25.00 price) requires only 26 licenses to be sold.
I'm not recommending price gauging, by any means. The examples are only to illustrate how your pricing strategy can greatly affect a multitude of business factors, so any decisions to either raise or lower your software prices should not be done impulsively. Don't lower your price because one angry user on an Internet newsgroup condemned your product for not being free. No matter how affordable you make the price, there will always be a select few individuals who complain that it is too high. And don't lower your price in the hopes of curbing piracy. Price usually has nothing to do with piracy. It doesn't matter if your product is $5.00 or $500.00, hackers crack software for the love of the challenge. Take the time to study the current marketplace and your competition. The trick is to set a price that effectively conveys quality while still beating competitive prices. If your competitor's product is $39.95, try pricing your product at a conservative $24.95. If you offer both a CD-ROM version and a downloadable version, build the manufacturing cost (let's say $5.00) into the CD-ROM price while giving a discount to your download customers. In that situation, you may want to try $29.95 for the CD-ROM version and $24.95 for the download version. You can always increase the price as you release new versions with additional features.
If you do decide to lower an already established price, you'll need to be careful how you position the change so as not to upset existing customers. If a customer paid the original $34.95 price last month and discovers that this month, the price has been reduced to $24.95 for no good reason, then expect to receive some angry e-mails. The saving grace is that customers perceive items going on sale for a limited time as an acceptable reason for lowered prices. Purchasing the item at regular price, not knowing that it would go on sale a month later, will undoubtedly cause irritation, but consumers will not harbor a grudge toward the software developer/publisher.
Declaring a sale price attracts new customers, especially satisfied users who regarded the original price as too high to warrant a purchase. But don't just state the new sale price. Let consumers know exactly what they are saving. NOW ON SALE: Only $24.95 - Save $10 of the regular price of $34.95 for a limited time! If those satisfied users have been holding out due to price, remove that barrier with a special sale opportunity that they won't want to miss.
On the opposite end of the spectrum, there are software products that sell for several hundred to several thousand dollars each. These applications are usually professional tools geared toward software developers, graphic artists, web designers, musicians, engineers, etc. These products used to be considered niche markets with smaller customer bases, so their expensive price tags would help finance the high cost of developing and supporting such sophisticated tools when the volume of sales couldn't. In today's world of affordable CD/DVD recorders, scanners, digital cameras and camcorders, consumers are finding an everyday use for these high-end software tools. They don't need all of the professional features, so they can't justify paying the high prices. Instead of ignoring this viable audience, many companies are releasing tiered editions of their software to cater to the consumer, prosumer, and professional markets.
Adobe Photoshop has been a longtime favorite among graphics professionals, but its price leaves it far outside the reach of most consumers' budgets. To take advantage of the growing popularity in digital cameras, Adobe released the affordable Photoshop Elements, a striped down version of Photoshop that includes the essential features needed for modifying and enhancing digital photos and scans while simplifying the process with step-by-step wizards and user-friendly guides. Adobe can't lose with this strategy, since Photoshop Elements, either bundled with a scanner/digital camera or purchased through retail, introduces new users to the power of Photoshop. Consumers will continue to upgrade to the latest version of Photoshop Elements and tech-savvy prosumers will eventually feel ready to graduate to the full-version of Photoshop. Either way, Adobe has created a solution for all levels of expertise, so as not to miss the sales opportunities emerging in the growing digital lifestyle arena.
For business and development tools, it's common to see three tiers: a standard edition, a professional edition, and an enterprise edition. Different companies use different names, but the end result is that they have the ability to offer several versions, each with a distinct price point and feature set, targeted to a specific market (see Figure 1). The standard edition may offer only basic features, while the professional edition adds advanced features. The enterprise edition then integrates multi-user collaboration and networking with the pro features.
Figure 1. Depending on your product's feature set, offering tiered editions will attract a broader audience, allowing customers to purchase the version that best suits their needs and budget.
Why go to all the trouble of releasing multiple editions of the same product? Because a one-person home business operator will not want to spend a lot of money on enterprise features that he/she won't use. Don't lose a potential sale. Offer a single-user personal edition to cater to those small business owners. As their business grows, provide an upgrade path, so that they can easily move up to the next tier if those features become necessary to their business. Giving consumers a choice allows them to purchase the features that best suit their needs and budget.
Even if your software sells for under $100.00, establishing tiered editions can increase sales. Those satisfied users who refused to pay for unneeded features can finally purchase the appropriate version that meets their comfort level. In Figure 1, all three editions and their respective feature sets for our fictional CodeQuiver product are listed on the company web site for users to compare. These kinds of checklists are a great way to easily showcase the differences between the tiered editions. Not including them in your documentation, marketing materials and web site will only invite countless users to e-mail you asking how they are different (which will quickly consume too much of your precious development time).
For products whose feature sets can't easily be divided into three marketable editions, another approach is to keep your full product intact and simply offer a striped-down, free Lite version as a way to attract new users. What makes a free Lite version different than the usual trialware is that being free, word of mouth spreads faster and people are usually more eager to download free tools than those that expire after 30 days. An effective, free Lite edition is one that offers enough features to be useful, but leaves out the most desirable features found only in the full commercial version. Free Lite versions do not display the typical nag screens found in shareware, so their prime objective is to produce loyal users who are constantly recommending your product, driving traffic to your web site. The retail industry calls this a "loss leader" with the goal that people come to download the free Lite version, but while they are visiting your site, end up purchasing the full version or some of your other products. For this strategy to really work, your web site needs to include finely tuned marketing messages that heavily promote the benefits of upgrading to the full commercial version. Offer special upgrade pricing for all Lite users. Why would you give Lite users a discounted upgrade price when they never bought anything to begin with? Simple. Reward customers for being loyal users, since they could just as easily buy your competition's product instead. The sole reason that the Lite version exists is to help sell more software, so make that purchase decision easy for users to make.
If you do decide to offer a free Lite edition, just remember that users will expect you to maintain and update the Lite version. This can be a draining overhead of development and support costs if the Lite version does not effectively increase sales for the full commercial version. On the flip side, it also opens an amazing bundling opportunity for you as well. If your software is an audio/video editor, music jukebox or multimedia viewer that could be used in conjunction with a MIDI keyboard, MP3 player, scanner, digital camera or camcorder, hardware vendors may be interested in bundling your software with their products. The catch is that most manufacturers will not bundle time-limited trialware or crippled demos - they want working software that won't expire, so they can advertise that their hardware products include full-functioning software that enhances the user experience. Getting your free Lite version distributed as bundled software is a great way to introduce new users to your product. Once they are registered users of the Lite version, you can offer them special upgrade opportunities (for the full version) to get even more out of their software experience!
Dangling the Carrot
With cracked software and stolen serial numbers so easy to find on the Internet, simply offering a sale price may not motivate users of pirated software to actually buy your product. As stated earlier, no matter how low you price your product, if hackers want to crack your application, they'll do it for the love of the challenge, not to save money. Don't waste your time trying to find ways to convert hackers into customers. Your efforts should be directed at the casual consumers who stumble upon pirated software and serial numbers on the various warz sites. Those who feel guilty might decide to take advantage of a sale price in order to replace their cracked version with a legitimate copy, but with the popularity of file sharing, don't hold your breath waiting. Sure, you could spend lots of time blacklisting stolen serial numbers on warz sites and sending warning e-mails to illegal users. While those defensive measures may stem the tide of piracy just a little, they won't sell more licenses.
Figure 2. While the free extras add value to the purchase price, this fictional offer also includes an expiration date as an incentive to place an order sooner rather than later.
So how do you convince a satisfied user to purchase your software instead of downloading a pirated version? Desperate times call for creative solutions. Offer something to consumers that cannot be found on a warz site or file sharing service. In Figure 2, as a value-added bonus for upgrading or purchasing our fictional CodeQuiver product, customers receive a Solutions Library of more than 500 code snippets in various programming languages. What's nice about this particular bonus is that the items come formatted as a database library that natively integrates with CodeQuiver, strengthening the usefulness of the product (which is a code snippets organizer). Plus, as a digital file, it can be easily delivered as a download, so no extra shipping costs are required. Other downloadable items that work well as value-added extras are ebooks, plugins, related helper utilities, etc. To effectively attract customers, make sure the bonus item is related to your product in some way, so that it also serves to enhance their experience with your software. For example, a music production tool could include a free drum loops collection or audio effects plugins with every purchase.
To help prevent digital bonus items (such as CodeQuiver's Solutions Library) from ending up as a pirated commodity as well, do not include it with the licensed download of the product. Require eligible customers to register their license online to gain access to a special password-protected download site. Encrypt the download with the customer's serial number or some similar method that would convince customers that illegally distributing this bonus item could be traced back to them. Obviously, an experienced hacker would see through the protective guise, but the purpose of this subtle scare tactic is to prevent average customers from making the bonus item available on file sharing services, etc.
If your product is only available as an electronic download, then you may want to avoid offering bonus items that require physical shipping, such as printed books, training videos or apparel. Unless you are already shipping a CD-ROM to your customers, the added expense of packaging and mailing the bonus item will drastically reduce your profit margin (especially if you are shipping it overseas). You may not make enough money selling a $39.95 license to a customer in Italy if it costs $26.18 to ship the free bonus book across the Atlantic Ocean.
Offering free software that you've created or some value-added item that does not incur manufacturing costs or licensing/royalty fees will also help you preserve your profit margin. For example, Figure 2's Solutions Library was compiled by CodeQuiver's creators, so bundling it with CodeQuiver purchases only cost the developers the initial time it took to produce the bonus library. Since CodeQuiver is a relatively inexpensive product, a Solutions Library made by a third-party developer that requires a licensing fee or royalty payment for each unit sold can negatively impact the net profit of each sale. Calculate the cost of goods before finalizing a special offer to ensure that your profit margin remains acceptable. The goal is to increase sales so that you can grow your business, not go out of business.
Do not offer product documentation or support as the free bonus items. These are elements that customers expect to automatically receive with a paid license. The only time support qualifies as a value-added item is if you offer paid support plans as separate purchases. For example, many development tools include a certain level of basic support, but beyond the initial offering, paid premium support plans are available for customers who need ongoing priority assistance. If your marketing efforts are targeting professional businesses, offering your Gold Support Plan (a $300.00 value) free with every purchase of your product might be quite attractive to business executives, engineers, programmers, etc.
Always state the monetary value (even if estimated) of your bonus items. Informing consumers of exactly how much money they would be saving by taking advantage of your amazing offer can be the key factor that convinces them to buy. A user may not know that the free audio effects plugins that come bundled with every purchase of your music production software are worth a combined retail value of $900.00. They knew they were saving money, but they may not have been aware that they would be saving that much money! With this in mind, make sure the bonus item you're offering with every purchase is an appropriate sales incentive. Including a free t-shirt (a $12.00 value) with the purchase of your $850.00 animation software may not provide enough motivation for those undecided users.
Another popular selling technique is the bundling of several related products into one cost-effective suite or collection. This approach tends to work well for productivity tools and games. Macromedia bundles Dreamweaver, Flash, Fireworks and Freehand together in one Studio package. Adobe's Creative Suite includes Photoshop, Illustrator, InDesign, and other applications. The hook is that the collection is offered at a price that's much less than if you were to buy all of those applications individually. To consumers who are interested in one or more of those products, the bundled suite appears to be best deal. At first glance, some developers may disregard this strategy, thinking that the suite cannibalizes individual product sales, but they would be wrong. Don't assume that someone who purchased the Suite would have ordinarily bought each and every product at full price if the Suite did not exist. Interested consumers would have probably purchased only one or two products, so they end up spending less than the Suite price. But since the Suite is such a good deal, they are willing to spend more money to save money. This introduces new users to products they ordinarily would not have purchased. If they enjoy using the software, they become loyal users who end up purchasing the next Suite upgrade instead of only upgrading the one primary product they use most. In the long run, it's a win-win situation for everyone: customers save money and you net higher profits.
For a Limited Time Only!
If you maintain an opt-in e-mail newsletter for announcing software news to your customers and interested users, be sure to utilize this powerful marketing tool to remind subscribers that your special offer will end soon. Do not assume that people will remember on their own. We all lead extremely busy lives, so there's nothing wrong with a helpful reminder of a money-saving opportunity. Just don't beat them over the head with a daily countdown or you may see a record number of people unsubscribing from your e-newsletter (or worse: accusing you of e-mail marketing abuse). Save the countdown for your web site. If your special offer lasts two months, then send your subscribers an e-mail reminder once a month and then one last reminder a week before the offer ends. Only send e-mails to those people who voluntarily subscribed to your e-newsletter. With the new U.S. spam law now in effect, developers need to tread carefully when promoting software via e-mail. We'll discuss the guidelines of the new CAN-SPAM Act and how it affects software developers in a future column.
We've covered several strategies for "sweetening the deal," but you know your software products and users better than anyone. Look at customer feedback and feature requests for inspiration. Devise your own purchase incentives that work for your software products. What value do your users place on price, free bonus software, choice of features? Experiment to find that key factor or combination of elements that persuades them to buy. If you can motivate those holdout users to finally purchase a license (and still make a decent profit in the process), then you'll be one step ahead of the game with the increased revenue needed to grow your software business.
Dave Wooldridge is the founder of Electric Butterfly (www.ebutterfly.com), the web design and software company responsible for HelpLogic, Stimulus, UniHelp, and the popular developer site, RBGarage.com.