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Software The Almighty Buck Businesses IT

Calculating the True Worth of Software 204

Posted by Zonk from the money-money-money-money dept.
chromatic writes "Many people recognize that the cost to duplicate a piece of software is a fraction of the number on its price tag. Many people also understand that software without support and maintenance loses much of its value. Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself? Robert Lefkowitz recently applied an options pricing model to software in ONLamp.com's Calculating the True Price of Software. Don't let the description fool you; it's both a readable and serious apologia of the common free software business model."
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Calculating the True Worth of Software More

Calculating the True Worth of Software

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  • The actual price of SW. (Score:5, Insightful)

    by alexhs ( 877055 ) on Saturday July 23, 2005 @02:42PM (#13145317) Homepage Journal
    Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself?

    Easy, these prices are proportional to the penetration indice of your previous software : a monopoly charge high fees, an outsider small ones.

  • Koders does something like this... (Score:5, Interesting)

    by tcopeland ( 32225 ) * <tom@NoSPaM.thomasleecopeland.com> on Saturday July 23, 2005 @02:45PM (#13145332) Homepage
    ...although simpler, I think. Apache 2 comes in at a half million dollars [koders.com], Tomcat weighs in at $250K [koders.com].

  • Worth or cost? (Score:4, Insightful)

    by mccalli ( 323026 ) on Saturday July 23, 2005 @02:46PM (#13145336) Homepage
    Headline talks of worth, blurb speaks of cost. As I'm sure the poster is aware, they're not the same thing by a long way.

    For example, I run a one-man contracting business. The worth to me of my accounts package is vast, the cost of it miniscule in comparison. And that cost is...one copy of Virtual PC for around £100 I think (I run OS X), one copy of XP for around £170 (retail, used it on a physical PC I no longer have and now it's on the emulator), then around £50 for Quicken UK. I can feel the Free people ganging up on me - I must be mad! That adds up to £230, that's nearly the price of a low-end machine! Well, to me that software is worth the amount, and the price is an utterly negligible amount of the cost of running my business.

    Cheers,
    Ian

    • I can understand that. There are various pieces of software that I use that I would be willing to pay far more than I paid for them because of their worth.

      But my question for you is... isn't there a Mac version of Quicken that would suit your purposes? I run the Mac version on my PowerBook, but I don't know if you mean something like QuickBooks that is for small business. There is a Mac version, I just don't know how it compares to the higher end offerings.

      • But my question for you is... isn't there a Mac version of Quicken that would suit your purposes?

        There's a Mac version of Quicken, but not Quicken UK. There are different tax rules in the UK which a US version wouldn't handle.

        In addition, the Mac version is quite a way behind its Windows counterpart. I find this quite surprising - surely the actual financial codebase would all be platform independent, with the GUI being the only platform-specific code required? But no - it's not. The Mac version isn

        • Very interesting. Thanks for the reply. Since I'm in the US (only one currency) and just do my checking account, it doesn't matter for me. It's sad when there is such a difference, but that's common. Oddly enough, it can be backwards though. I find MS Office on my Mac MUCH nicer in many ways than the Windows version. The floating pallets, the note-taking feature in Word, and a few other things.

          I'm sure Quicken will be updated eventually. Maybe the next version. Too bad MS Money isn't available on the Mac t


    • People should also realize that software provides them the means to accomplish tasks they would not be able to accomplish otherwise. Herein lies the value of one's time, and whether it's more economical to allocate funds to the purchase of software that can do a job faster and better, or stick with something manual. The actual physical cost of reproducing the software itself is miniscule...the value it provides, however, can be quite substantial.

    • Re:Worth or cost? (Score:3, Insightful)

      by xenocide2 ( 231786 )
      The whole article hinges on the financial and economic theory that cost (ie price) is an indicator of worth. The difference between the two is called consumer surplus, and in theory businesses attempt to "capture" that surplus by attempting to charge you more for it. In markets where we can't charge specific customers exactly what they're willing to pay, the price is simply the one that maximizes revenue. Not that there's any way to really know which price maximizes revenue.

      Also, consider your alternative:

      • Copyright law drives the high margins on software. Whether this is good or bad seems to depend a great deal on whether you're an american or not. I suspect an even stronger indicator would be whether you own stock in MS or Oracle or IBM or not.

        Very insightful.

  • To me.. (Score:4, Insightful)

    by riflemann ( 190895 ) <riflemann&bb,cactii,net> on Saturday July 23, 2005 @02:47PM (#13145339)
    The price of software is whatever value it adds to my business, or personally it's whatever I'm willing to pay for whatever convenience it offers (after all, software is 90% "convenience" for personal use)

    If I were a doctor, a full medial records + billing application would be worth many thousands (or equivalent of support services for free software). If I am running a bakery, then inventory software is worth far less.

    As a hobbyist, software related to my hobby would be worth more than some random game to play with once in a while - if I'm a gamer, that game is worth a lot more than the same hobbyist values it.
    • Exactly.

      I fool around with Adobe Premiere Pro sometimes (To be honest here--I did not buy it). I use it to produce fan videos for EVE Online, but thats about it. To me, it isn't worth much, nowhere near the 800 dollar price tag.

      Now bring it to a professional who makes his living with it. To him, its worth thousands of dollars, far more than the price tag.

      • Re:To me.. (Score:3, Insightful)

        by Rosco P. Coltrane ( 209368 )
        I fool around with Adobe Premiere Pro sometimes (To be honest here--I did not buy it). I use it to produce fan videos for EVE Online, but thats about it. To me, it isn't worth much, nowhere near the 800 dollar price tag.

        What a strange way of thinking. It's like saying "hey, I drive a Ferrari from time to time, but I really don't use it all that much, therefore it's not worth X million dollars, so I stole it".

        Tell you what: in a normal world, if Adobe Premiere Pro isn't worth 800 to you, you don't buy it,

        • Re:To me.. (Score:5, Insightful)

          by bnenning ( 58349 ) on Saturday July 23, 2005 @06:21PM (#13146426)
          Tell you what: in a normal world, if Adobe Premiere Pro isn't worth 800 to you, you don't buy it, and you certainly don't steal it. Period.

          I'm disappointed at how many people here go along with the BSA/**AA line. Duplication is not theft. It may be illegal, and it may be wrong, but there is a clear difference.
        • Adobe Premiere has no free alternative for what I do, at all. Also, explain how copyright infringement = stealing? They're completely unrelated. In fact, the main difference is that stealing hurts the owner because the owner no longer has the item, while copyright infringement, assuming you would not have bought the program either way, hurts nobody at all.
          • If I steal someones idea, did it not hurt them since they still have it?
          • Adobe Premiere has no free alternative for what I do...

            So what? Pinacle and ulead have $99 and under software that does video editing, but you choose not to pay for them either. There's also shareware stuff that costs less, and should be suitable since, as you yourself point out, you're not a professional.

            But you don't support them either. Why is it that I think if there WAS a FOSS video editor... wait... let's do a search... yep, lot's of OSS solutions. Face it. You have alternatives, but prefer to st

    • If I were a doctor, a full medial records + billing application would be worth many thousands (or equivalent of support services for free software). If I am running a bakery, then inventory software is worth far less.

      Interestingly enough, such applications go for thousands. The problem is that people just starting out, medical students, etc., can't afford that. There's a massive disparity between the free and low cost software out there, and the $10,000 packages. That isn't surprising.

      What is surpris

    • Re:To me.. (Score:3, Interesting)

      by Jasin Natael ( 14968 )

      This raises an excellent point, which I had hoped (considering the title) would be explored in TFA. How much should one charge for software, especially for mission-critical applications? Is it equitable for a developer to charge a portion of the potential benefits? Should the developer set the price of sales based on the cost of initial development (and hence replacement)? Let's explore the issue.

      Say I'm contracting for a company (with an option to resell the software later to other companies) who need

      • Re:To me.. (Score:4, Insightful)

        by adam872 ( 652411 ) on Saturday July 23, 2005 @07:18PM (#13146677)
        When talking about stuff like this, you get into the world of cost-plus versus value based pricing. The cost-plus pricing, as you alluded to, is based on the question: "how much does it cost me to engineer this widget, plus the cost of supporting it over time?". You calculate that cost and add markup to it to calculate the price you will charge. In a competitve market place, you will be under pressure to lower prices to win business, which eats into your margin. So you are then left with either reducing your engineering costs or accepting lower margins. That is, unless you are cheaper than your competition and then you get to preserve your margins.

        The other way to do it is to work out how much value this widget creates for the customer. You ask yourself the question: "how much will this widget do one of: lower operational cost, increase productivity, enable new opportunities or reduce risk?". If the numbers are substantial, you charge a proportion of that value as your price (you better be able to demonstrate that, otherwise noone will buy it). In my experience, value based pricing is higher than cost-plus.

        Which way you go depends on how much of a commodity your product is. For stuff that anyone can make, you have little chance of using the value based model, given a high rate of competition. For highly specialised areas, the opportunity is greater. However, most widgets become commodities in the end. Engineering practices become more efficient and the market widens for all but the most specialised of products (thereby increasing the volume but often lowering the price). You also have other players moving into the market and spotting an inefficiency they can exploit by being more efficient etc (Dell are the classic example of this).

        The firm I work for wrestles with this choice daily. Our tools are very specialised and often create enormous value for the customer (last week, one tool saved the customer over USD 1M, but we charged a fraction of that and still made excellent money). At the same time, the market is competitve, preventing massive price hikes.

        In terms of your question: I don't think there is an ethical paradox here. You simply decide which of the models you can use and charge accordingly. Assuming you are not in a monopoly situation, the free market will tell you if you are right or wrong with the pricing. I do, however, think that in a monopoly situation, the potential for market distortion and underhand dealings by suppliers becomes almost a certainty.

  • Price of Tetris (Score:4, Funny)

    by SnappingTurtle ( 688331 ) on Saturday July 23, 2005 @02:49PM (#13145351) Homepage
    Scene: me, in an arcade, 20 years ago

    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    another game: 25 cents
    getting the high score: priceless

    (or so I thought at the time)

    • Re:Price of Tetris (Score:3, Insightful)

      by Kjella ( 173770 )
      Since you start with another game: 25 cents, I assume this is the abridged edition?
    • Reminds me about the time we had arcade machines in our videostore (1987). We rented the machines for a 60% split of the profit. The catch was we had to pay the electric bill, our bill more than doubled and the money from the machines didn't pay for the extra electricty. After doing the math my sister got mad and unplugged the machines at closing and plugged them back in in the morning. This wiped the high scores. Kids would come in and see their score gone and set a new one. We ended up making about 40% mo
    • Scene: me, in an arcade, 20 years ago

      another game: 25 cents
      another game: 25 cents

      There's also the scene most clever teens played out 20 years ago:

      another game: 25 cents
      another game: 25 cents

      ...Uuuh, that's a ripoff...Go to the grocery store, buy a gas stove lighter, remove plastic shell...

      another game: *zap*
      another game: *zap*
      another game: *zap*

      ...

  • I keep hearing it... (Score:3)

    by Kjella ( 173770 ) on Saturday July 23, 2005 @02:50PM (#13145353) Homepage
    Many people also understand that software without support and maintenance loses much of its value.

    ...but I don't find it to be true. Apart from Internet applications that can be vunerable, I got lots of pieces of useful software on my machine, some are EOL'd. I'm still running win2k sp4, and unlike xp sp2 everything seems to work just as it did back when win2k was released. And my linux box has certainly never seen a support contract of any kind. My willingness to pay is ~0$, so it's not for lack of offers.

    If I buy Photoshop today, it'll still be a kick-ass graphics tool in 5 years or 10 years. As long as the OS can keep up with hardware support (cameras and printers), is there any reason why I would need support and maintenance? Beyond public forums, that is? Now the "free upgrades" of most OSS apps are pleasant, but by no means necessary. There's simply not much point in sticking with an older version, but you could certainly do it.

    I know things are very different in the corporate market, where a stoppage means major $$$ down the drain. But as far as I'm concerned, it's mostly a "I would pay if I had to, but support contracts I don't have to, so I don't" attitude to software. I think that's fairly common.

    Kjella

    • Re:I keep hearing it... (Score:2, Insightful)

      by Anonymous Coward
      Many people also understand that software without support and maintenance loses much of its value.

      Many people have also found out the hard way that
      meaningful support is non-existent.
      I have never, not even once, gotten the correct
      solution to a problem with commercial s/w.

      Generally, after some sweat, I've been able to create a work-around or discover the solution on
      my own.

      So, here's one place I can't say you get what you
      pay for.

    • Yeah, most of this support maintanence is mending artificially created problems. Fix today what you broke yesterday that fixed something else that you broke before that. How can you trust that they won't abuse such techniques?

      You are often fine and dandy with the way everything works, then you get some new application, such as a new tax program, that requires you to upgrade a component in your OS, that requires you to upgrade your full OS, that requires you to upgrade your hardware, and toss the old stuff
    • I think the corporate line would change if that same person polled were asked about their home machine. My informal poll of home users is that they wouldn't pay 20USD per month to have an assurance policy on their PC, where a technician comes around every month for an hour to check if they have the patches right on their box, and they get phone support for free. I cancelled the service after I had absolutely nobody embrace the idea, including the clients who spend 40 times that much having emergency calls

  • Sure there is... (Score:4, Funny)

    by zr-rifle ( 677585 ) <zedr@NoSPAM.zedr.com> on Saturday July 23, 2005 @02:51PM (#13145358) Homepage
    $699

    Thanks,
    Darl.

  • Cost vs value (Score:3, Insightful)

    by Anonymous Coward on Saturday July 23, 2005 @02:52PM (#13145360)

    Many people recognize that the cost to duplicate a piece of software is a fraction of the number on its price tag. Many people also understand that software without support and maintenance loses much of its value. Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself?

    Of course there is. Cost and value are two different concepts. Something can cost nothing, yet be very valuable (e.g. Apache).

    Pricing things like support is merely the exercise of coming up with a price that is low enough to find people who value it more than the price, while still being higher than the cost to provide it.

    The cost to provide support includes things like employing people who know all about the software.

    The value to the customers is that they can rely on the software and get problems sorted more quickly without having to employ their own experts.

    Neither of these bears any relation to the cost of the software itself. It can be free, or it can cost thousands, the principle is the same.

    There is a difference between Free Software and proprietary software though; with Free Software, you can get support from a number of competing firms, and with proprietary software, you are limited to the original vendor. Free Software support has the advantages and disadvantages of capitalism, proprietary software support does not.

  • this just in: (Score:4, Insightful)

    by sum.zero ( 807087 ) on Saturday July 23, 2005 @02:53PM (#13145364)
    value is subjective.

    sum.zero
    • Not at all. In the business world, value is the productivity minus the cost.

      For example, buying quark XPress, for my small business, along with Adobe Acrobat:

      Contracts fulfilled: Approximately $75999. Employee time se job:$15,000. Software cost: $1k. Value:$59k.

      MS Word: Cost $400, Contracts fulfilled: $35k. Corruption bug repaurs: $7000, Corruption bug preventative action:$5000. Lost contracts, due to time wasted on corruption bug, and lost customer confidence:$21k. Total Value:$1600.

      In

  • A Financial Analysis of Things We Already Know (Score:3, Informative)

    by Akoman ( 559057 ) <medwards@walledcity.ca> on Saturday July 23, 2005 @02:56PM (#13145372) Homepage
    There is a lot of finance talk going on in this article, but the conclusion he comes to is one that many of us already know: commercial Open Source creates a market for support and maintenance. Article might be good for corporate types wondering why licenses cost nothing over here.

  • Worth of software... (Score:3, Interesting)

    by Nick Driver ( 238034 ) on Saturday July 23, 2005 @02:58PM (#13145380)
    Software (actually the entire software and hardware combo as a functional system) is only really worth what it would save you in the time and money it would take to accomplish a particular job in another non-automated way. If doing that job in the manual, non-computerized way would cost you less, then you shouldn't involve computer automation at all. Every businessperson should really do a thorough cost analysis before allowing themselves to become addicted to any software app. Sometimes they'll find a system to be a tremendous time and cost saver, easily worth many times what the actual cost to implement the system and train the end users totals up to. Sometimes they'll find the system to be about as productive and cost beneficial as a heroin addiction.
    • Yeah, okay, the $5.99 solar-cell hand calculator that extracts enough cubic roots that would take me a day to do manually, is that worth a day's work? That's not a rule you should erect, why shouldn't something that's worth a lot to me, be of very low cost? Let's evaluate something, like oxygen, how much is that worth to you? In the free market something that is very abundant and easy to mass produce may get a very low price compared to what its true worth it, simply because the competitor suppliers are wil
      • I was thinking more along the lines of something like this example, which is an actual business case that my employer went thru with a newly built civic arena in a nearby town.

        The manager of this new municipal arena was at first, absolutely bent on buying a fancy computerized point-of-sale and inventory management system for all the concession stands. He thought it would cost about $20K, when the bids came in, the average price was more like around $70-90K for this system to be installed into all the conce

  • Harder to say (Score:2, Insightful)

    by SamShazaam ( 713403 )
    As computers become more common it becomes harder to say. How much is a letter of the alphabet worth to you? How much is a common tool, such as a screwdriver, worth to you? Imagine if you could be denied the use of these though Intellectual Property laws.

  • Joel on Software on the same topic (Score:5, Interesting)

    by Psionicist ( 561330 ) on Saturday July 23, 2005 @02:59PM (#13145391)
    How much should I charge for my software? http://www.joelonsoftware.com/articles/CamelsandRu bberDuckies.html [joelonsoftware.com]

    You've just released your latest photo-organizing software. Through some mechanism which will be left as an exercise to the reader, you've managed to actually let people know about it. Maybe you have a popular blog or something. Maybe Walt Mossberg wrote a rave review in the Wall Street Journal.

    One of the biggest questions you're going to be asking now is, "How much should I charge for my software?" When you ask the experts they don't seem to know. Pricing is a deep, dark mystery, they tell you. The biggest mistake software companies make is charging too little, so they don't get enough income, and they have to go out of business. An even bigger mistake, yes, even bigger than the biggest mistake, is ...

    • Re:Joel on Software on the same topic (Score:4, Insightful)

      by MBCook ( 132727 ) <foobarsoft@foobarsoft.com> on Saturday July 23, 2005 @03:40PM (#13145567) Homepage
      Very little ($20?). That's my answer. Here is why.

      People fall into three groups by and large. Here is what each will pay and why.

      1. Mac People - They have iPhoto, or can buy iPhoto (as part of iLife) at a great value. That is an AMAZING piece of software. Good luck getting people to switch off it.
      2. Windows People - They have Picasa. It's the closest thing on Windows to iPhoto. It's not as great, but is fantastic compared to everything else out there I've seen. It's made by Google and is FREE. Good luck getting people to buy your product.
      3. Linux People - They want it free. Free OS, free software. Some will pay, but many will just use some OSS photo organizer and be happy with it because it's free. Not to start something, just my observations.

      All that said I agree that pricing is a major mystery. Just a little too high and no one would touch it. A little too low and people will buy it, but as the blurb in the parent post states, you could have made much more money.

      And then there are other cases. Like when I went from a PC to a Mac I purchased a little program for about $20 to turn my Outlook e-mail into something Mail.app could import. I HATED paying $20 for it, and I avoided it as long as I could. But after two days of fighting every free way I could, I bought the program and was glad I did (and wished I would have done it sooner). Had it cost less, I would have bought it sooner, but then they wouldn't have gotten much money ($5 probably would have done it). You also get things like TiVo. People balk at that (Why should I pay $12 a month for what I can get for free with my VCR?), but as a TiVo user I would gladly pay double that if they were going under at the current price. But how much trouble would they have selling them with a $25 per month subscription?

      The only people who have it right are MS. They charge a ton, get a ton of money, and everyone is locked into (or at least thinks they are locked into) their software so they pay it. Everyone hates it, but most people don't do anything about it.

  • *magical finances hand waving* ...OSS is capitalistic.
  • price of software =
    time spent on making it
    X 2 X (minimum wage in your area)
    +
    length of projected lifetime before next charged upgrade (as in the next time you plan to ask for the bling) X 2 X (minimum wage in your area) ... you get the idea :D

  • True Worth To Me... (Score:4, Interesting)

    by __aaclcg7560 ( 824291 ) on Saturday July 23, 2005 @03:16PM (#13145470)
    My contract rate as a QA Lead Tester is between $15 to $20 per hour. That's how much software is worth in Silicon Valley. However, outside of Silicon Valley, I would get $50 to $70 per hour for the same kind of work. Go figure.

  • One of the great things about software (Score:3, Insightful)

    by ShatteredDream ( 636520 ) on Saturday July 23, 2005 @03:17PM (#13145471) Homepage
    Is that most of the cost that goes into developing it is in the labor. The only problem that companies like Microsoft face is that their shareholders have gotten addicted to the high profit margins that have dominated for so long in the commodity software market. Realistically, Microsoft could afford to cut the cost of Windows from $100 per upgrade disk to $50 a copy and from $200 for the full version to $75-$100 if they wanted to become more aggressive. Office could see similar price reductions, and in fact such a major price reduction might be enough to cause a lot of buyers to just say what the hell and buy the software even if they don't REALLY need to upgrade.

    If companies like Microsoft really want to rake in the cash on support and upgrades, they need to make them cheap and exploit economies of scale. It'd be a lot easier to convince many companies to buy a support contract that costs $5-10/machine/month for support and upgrades than make them pay $250 for an upgrade every two years. With that monthly fee, the company gets seemless upgrades and Microsoft gets a guaranteed revenue stream from them.

  • What the competition is charging ? (Score:5, Interesting)

    by shashark ( 836922 ) on Saturday July 23, 2005 @03:20PM (#13145480)
    You can't charge awefully more than your competition, can you ? If the competition gives it up for free -- then well, all your calculations go awry.

    Think about the price of a browser, media player and well, a operating system.

    Think Netscape vs IE circa 2000 AD. Now, only a free product could defeat IE.
    --
    This sig is up for free.

    • Re:What the competition is charging ? (Score:5, Interesting)

      by mr_gerbik ( 122036 ) on Saturday July 23, 2005 @03:29PM (#13145519)
      Think Netscape vs IE circa 2000 AD.

      Netscape was dead by 2000.

      Think Google Earth, Picasa, and Gmail. But hey, Google buying up companies and offering the software for free to kill the competition is a honorable thing right? Not evil like when Microsoft did it.

      • Re:What the competition is charging ? (Score:3, Informative)

        by Anonymous Coward
        But hey, Google buying up companies and offering the software for free to kill the competition is a honorable thing right?

        I think now that Google is a public company it is inevitable that it will follow its motivation. The examples you cite, however do seem to be different. I don't see that any of these products are tied (pdf) [usdoj.gov] to an existing offering, responsible for breaking [theregister.co.uk] a competitor's product or obtained through outright [vaxxine.com] theft [infoworld.com]
      • I believe the problem with Microsoft wasn't that it was giving away software for free, but that it was rolling in software with it's OS, effectively bundling their new software with new computers and leveraging their enourmous monopoly. In contrast, Google is competing on a level playing field; at any moment someone could introduce a similar product based on advertising and cut into their game, unless you wish to claim that Google has a monopoly on advertising and has been leveraging that monopoly.
    • Ah, this is interesting. I have been using browsers, media players, and operating systems for many years. I have never directly paid to use the former two. It was either a free download(perhaps FTP) or came with the machine. The later I have directly paid to add to a machine once in my life. It was CP/M. Otherwise it came with the machine or was an inexpensive upgrade.

      What we learn from this is that utility, or operating, components are not so valuable in themselves. We buy a complete car, not a ch

    • "You can't charge awefully more than your competition, can you ? If the competition gives it up for free -- then well, all your calculations go awry. "

      This is not the type of pricing formula the article is discusing. It is much more interesting than that.

      What the author is basicaly saying is that Free software and proprietary software cost about the same once you figure out what you are actually paying for (by breaking out all the hidden elements and assigning them a value).

      His conclusion is that, at le
      • Even if you can split off the option to have maintenance and upgrade into a separate value, it does not mean it costs the same - in particular, you will always have to pay for that option if you buy proprietary software(and you might not get returns for it - Windows support in the past ended 5 years after a release, or the company might go broke).

        With free software, you don't have to pay for the option to have support, although you have the option to do so if you wish to be professional.

        This means the art
  • The premise of the "price" or "cost" part of the question is the fallacy called the "Labor Theory Of Value". The fallacy is demonstrated by the simple fact that no two people produce exactly the same "value" in the same time, or the same job. Price is a calculation separate from cost.

    http://www.mises.org/humanaction/chap12sec3.asp [mises.org]
    "The Sphere of Economic Calculation"

    "Value" is utterly subjective. What is worth nothing to me is of tremendous value to someone else. One loaf of bread to a starving man is va
  • The market determines the value of any good or service. People will pay exactly what they are willing to pay and no more than that.

    If you think there are no alternatives to your product, or you have a monopoly for some other reason, you might be able to set a ridiculous price for it (as Microsoft tries to do -- 200 bucks for Windows XP? Hmmph). But this will cause everyone to pursue superior, cheaper alternatives and sooner or later, you'll be forced to drop the price significantly. Never underestimate the
    • Quothe CrazyPhilMan If they'd just charged five bucks for a CD in the first place, nobody would have given them a lick of trouble.

      That's only partly true. I read an interesting article in Wired some time back which examined the phenomenon that, although CDs are cheaper to produce than vinyl, they are significantly more expensive than vinyl was in its heyday, and that CDs sales growth (after the initial adopter curve) have far outpaced LPs (again, in their heyday).

      The reason they gave, and I'll buy it,

    • your economics needs work. People do not pay what they are willing to pay unless a supplier has a monopoly and can engage in perfect price discrimination. Neither has ever been the case in at least the last century, probably much longer.

      Microsoft does not go off setting a ridiculously high price just because it is a monopoly(which it isn't a pure monopoly, it is actually the main actor in an oligopoly). They set the profit maximizing price and it happens to be that with market power, that price is highe

  • An example (Score:2, Informative)

    by Donny Smith ( 567043 )
    Just this morning, I was wondering the same question.

    There's this bulletin board software that I use.
    It's open source, it's popular, it's free, but it is an unsecure piece of shit. There's a security fix for it every fucking month and once I got hacked because I didn't have time to update it for like 3 days (luckily the hackers - nice of them - only defaced the home page and left the mySQL DB untouched)

    So this morning I concluded it SHOULD be free because I really wouldn't wanna pay or donate a single cen
    • Considering how sane the configuration of postfix is, I'd probably pay a reasonable fee to use it.

      It has saved me a lot of time in the past.
  • One thing I like is that TFA points out that with open source software, you as a customer can competitively select your vendor for maintanence of the software (as you should be able to do in any capatilistic / free-market system). In contast, for NON-F/OSS software you're forced to stick with a single vendor (damn commies)

  • True Cost of Software (Score:3, Informative)

    by bokmann ( 323771 ) on Saturday July 23, 2005 @05:16PM (#13146080) Homepage
    I hate it whenever I see a sentence that equates the cost of creating software to the cost of copying the software.

    I am a software engineer. the piece of software I work on has 18 people working on it full-time to write it. THAT is the major cost. Duplicating it is a trivial expense. The cost of the people has to be amortized over all of the copies generated.

    I contribute to open-source projects as well; I do that for a different motive than putting a roof over my head. Congratulations to those who can do that entirely with open source; for me, open source is like pro-bono work for a lawyer; I want to give back.

    All that aside, you NEVER pay for the true COST of something, you pay for its true WORTH. The soft drink you are drinking right now has about $.06 worth of sugar water in it. I bet the can, transportation, and refrigeration cost more than the contents. I won't even try to calculate the cost for a $5 cup of coffee at Starbucks.

    • I hate it whenever I see a sentence that equates the cost of creating software to the cost of copying the software.
      Well, if we go back to Econ 101, we'll discover that in a competitive market, the actual price is driven down to the marginal cost of production and you'll have a hard time recovering your fixed (sunk) costs. So if you want to make money you have to make sure your fixed costs are low or you have no competitors.
  • "When I informally polled enterprise software buyers about what they would pay for software given that they wouldn't be able to buy any maintenance for it (as a middleman, I'd be selling that to somebody else), the universal response was that they would pay much less than the license--implying that the option to buy maintenance was clearly a significant fraction of the price."

    I wonder, what would he conclude if he sold the support without the software? That the software is worthless?
  • They wouldn't even listen to my question unless I gave them a credit card number they could charge $150 to.
  • Having studied mathematical finance, I immediately noticed a flaw in this analysis:

    The underlying price--the price you'd have to pay if you didn't have an option--we'll leave at $100. The next version will be priced the same as this one. Because you're upgrading, you have an option with a strike price of, let's say, $50. That is, you'll be able to upgrade to the new version for only $50. A five-year option for a $100 underlying price with a strike price of $50 and a volatility of 30 percent (with a 5 per
  • or at least over my willingness to think hard on a saturday evening. But when you consider arbitrage of software and support contracts, isn't there a problem, that the support is worthless without the software? When you buy a "score" you're paying for a revenue stream, and when you buy the "prime," you're getting the right to vote at stockholder meetings. I don't pretend to know who gets what in case of a liquidation and return to investors. I suspect the prime gets the money in that case.

    But my point is t
  • The "options" make up most of the price of the software, leading him to conclude that the actual licence is worth next to nothing. However, a big part of the options is the $50 discount you get if you already own the software.

    If the bare licence would cost $0, then so would the upgrade.

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