I first heard this story at business school, I still love it today:
Steve Blank: Can I tell you a pricing story? When we starting Epiphany, I had no idea how to price enterprise software. There was one small problem, I had started an enterprise software company and never been in the business.
But, I had heard, and it actually was true, there was a woman named Sandy Kurtzig, who had started ASK Softwark. She was one of the first woman entrepreneurs, woman CEOs of a large corporation. And they were making software for IBM mainframes that was manufacturing software. Something called Manman, which I used in the late ’70s, early ’80s.
Since it was the first non-IBM enterprise software on IBM mainframes, [when] she got her first potential order, she didn’t know how to price it. It must have been back in the mid-’70s. She’s [with] this buyer, has a P.O. on his desk, negotiating pricing with Sandy.
The way she tells the story is, she didn’t know what to ask for it. But, the head of manufacturing told the buyer to go buy this damn thing. [He] didn’t care, [if] it was the world’s best piece of software. So, Sandy said she goes into the buyer who says, “How much is it?”
And Sandy gulped and picked the biggest number she thought anybody would ever rationally pay. And said, “$75,000″. And she said all the buyer did was write down $75,000.
And she realized, shit, she left money on the table. Sandy Kurtzig was awesome. And she said, “Per year.”
And the buyer wrote down, “Per year.”
And she went, oh, crap what else? She said, “There’s maintenance.”
He said, “How much?”
“25 percent per year.”
And he said, “That’s too much.”
She said, “15 percent.”
And he said, “OK.”
[Ed: This is called “flinch pricing.”]
So, enterprise software got priced at $75,000 per year, per module. Now, I have to tell you when I started at Epiphany I heard this story and someone said, “Steve, how much is your software?”
I said, “$75,000 per year, per module.”
This and two more great pricing anecdotes from Steve Blank as transcribed by VentureHacks are here.
There is no one formula to pricing anything, whether virtual goods or enterprise software. It is where willing buyer meets willing seller.