Or, "How not to make money selling software: a succinct illustration of cost-based and market-based (specifically, value-based) pricing in just two comment threads."
Why can Github charge FIVE THOUSAND DOLLARS PER YEAR for a local install of Github and succeed, impressively so, despite a small army of nerds pointing out how inexpensive it is to run one's own Git server and Gitorious? Why does 37signals have an office with walls made of 37signalsium (really, seen it, it's fuzzy) and trendy furniture despite selling software that the nerdosphere can clearly duplicate? Why does Yammer even consider publishing a $5/user/month price for software that is among every web geek's top-5-most-likely-personal projects?
Answer: they don't sell gypsum.
Cost based pricing, which works for gypsum sales but not so much for software, suggests that the price of a nice photo should be the price of the gas to get to and from the photo shoot, possibly divided by the number of people interested in buying the photo, plus maybe throw a couple bucks in there and buy yourself something nice, photographer.
Value-based pricing says, "how much it cost me to create the photo is irrelevant". YES YES A THOUSAND TIMES YES, say the nerds. THAT'S EXACTLY WHAT I WAS SAYING! But value-based pricing continues: "no, what matters is how much it would cost you to make that photo and how much benefit it brings".
How much it would cost you to make that photo: (say) $6000, perhaps divided by the number of different photos you'd take given the same setup (but then also scaled back up to account for the headcount or professional services required to take lots of pictures).
How much benefit? It depends. I could take 10,000 words listing out factors in figuring it out. Most importantly: what are the substitutes to this photo and how much do they cost? For some businesses, clip art of the Eiffel Tower suffices to bring 80-90% of the value. For others (like ad-sales print publications), comparables might also be very expensive.
Now, the extent to which the YOUR business benefit from my photo exceeds MY cost to produce the photo is MY ADVANTAGE IN PRODUCING PHOTOS (the extent to which your cost exceeds my cost is my "comparative advantage"†††, and if it's a positive number possibly suggests that I'm the one who should be doing the photos in any case, since you have better ways to put your money to use). Having an advantage is a good thing. Among other things, it's a key reason why software startups are lucrative, and why we don't all work on line-of-business software for non-software companies.
It's probably true that a photo of a sunset isn't worth $6,000. But, exclusivity aside, the value of the photo also has nothing to do with how much it cost the photographer to take each shot at the margin, and it has nothing to do with the cost to make each marginal sale. What matters is how much it costs the customer to replace that value with a substitute, and in that analysis the $6000 set-up cost, while not determinative, is relevant perspective.
The moralism in these threads is an irrelevant sideshow. Situationally, the nerdosphere oscillates between extremes when trying to compute valuations for stuff with intangible-seeming benefits. Today, the nerdosphere apparently thinks either (a) every photo is a precious snowflake or (b) photo costs should be scaled by the current price of hard disk storage. Yesterday, it was whether it's right for Github to charge per repo. Before that, it's whether it's fair to have markets for spec work like 99designs.
None of that matters. What matters is, is there a market for what you're selling, and will it clear based on the model you use to price stuff on the market. Clearly there is a market for high-quality photography. Clearly it is not a cost-based market like gypsum, or there would not exist sites selling photos with royalties attached, or photos costing hundreds of dollars --- which clearly those sites do exist. So instead of arguing about how much photos should cost --- because, again, they cost what the market says they cost, not what you think it costs to make them yourself --- think instead about how this discussion applies to your own work product. More than you think it does, is my guess.
††† (Actually this isn't all what comparative advantage is; comparative advantage says, if there's a market for widgets and a market for photos and you're better at widgets than photos and I'm better at photos than widgets, then I should do widgets and you should do photos, which is a subtly different idea, but the point stands either way.)
Being more on the business side than the development side, I completely identify with what you're saying. The statement that value is derived from the cost of the alternative is central to market thinkers, of which I identify myself as.
However! This statement struck me as out of place:
> The moralism in these threads is an irrelevant sideshow.
There is not 100% agreement on the moralism of copying digital goods. There is, agree or disagree, a lack of 100% acceptance of copyright as it stands today. This introduces an alternative that costs $0, which messes up the whole market equation. This moral conflict has to be resolved before you can arrive at a market price for digital goods.
We software developers are in a whole heap of a lot of trouble if we expect the broad market to dignify the idea that digital goods are legitimately priced at "what they cost to copy".
I think the moral position of "copy anything" is definitely questionable, but time and time again we've seen the actual markets compete in this way. The decline of music sales is practically a case study in this fact. Whether or not someone will openly state that they evaluate the "cost to copy" option is one thing, but how they act is another. I can't claim that I've never pirated a movie or music, thus I have no moral basis for dismissing that position out of hand.
I'd take the contrary view. If you don't consider "cost to copy" a market competitor, you're in a whole heap of trouble. Position your business in a way that isn't exposed to this type of alternate-pricing, or be prepared to compete with it.
Since appropriating someone else's photo for commercial use without compensation will assuredly get you sued and incur costs far greater than simply licensing the photo, there's an irony to the fact that the discussion on HN about photos is couched in moralism, even though morality is way less relevant to the photo case than it is to the software case (you can easily appropriate software without paying for it, as GPL violators do every day).
There is a difference. GPL software like Linux is hugely valuable, it's value is generally not measured, since it is a cost saving (and a near no-brainer to choose when the quitting is good), not a profit or expense.
Also, MS and Apple (only _really_ since recently) sell software, but Google and Facebook no not.
††† (Actually this isn't all what comparative advantage is; comparative advantage says, if there's a market for widgets and a market for photos and you're better at widgets than photos and I'm better at photos than widgets, then I should do widgets and you should do photos, which is a subtly different idea, but the point stands either way.)
Surely this is supposed to be the other way around. If I'm better at photos than widgets, and you're better at widgets than photos, then I should do the photos and you should do the widgets ... right? Crazy pills?
Comparative advantage is actually even more subtle than that. Even if we're both better at photos than widgets, it's still beneficial for me to produce the one I'm better at relative to you (say photos), and for you to produce widgets. Then we can trade with each other and both gain from trade.
Right. You're discrediting the Labor Theory of Value, variations of which are endlessly seductive and are always creeping back in as The Way Things Ought To Be.
>Value-based pricing says, "how much it cost me to create the photo is irrelevant".
Almost, but not quite. In the case of a hobbyist, yes it's irrelevant. But for a business, the cost to create should set the minimum cost they'd be prepared to charge (or at least be expecting to charge - you may find yourself discounting it below cost if you've already made it and fail to sell).
I do mostly agree though, and it always amuses me when I see people complaining about eBooks that cost more than dead tree ones. If it's not worth more to you, then don't buy it.
>The moralism in these threads is an irrelevant sideshow.
Again, not quite. Morality doesn't, or shouldn't, come into play when determining the price. But it does when it comes to how a "buyer" reacts to a price they don't like in relation to goods that have no marginal cost to produce a new copy - e.g. digital photo, movie download. If you don't like the price that's been set, but it's not going to cost the creator anything for you to simply take a copy for free, do you have any moral issue with that?
Possibly, but it's usually not the price of the ebook itself that they are complaining about. It's the fact that the paper version is cheaper. If someone charged £10 for a particular ebook and £15 for the paper one, then there would rarely be much complaint. If they charged £10 for the ebook and £5 for the paper one, then people are up in arms.
And the argument is alway that it's cheaper to make the ebook than the paper one, and that it's therefore wrong to charge more for the ebook. The point is that this is the wrong way to think about it. As a buyer working out how much you're prepared to pay for something, the cost of manufacture should be pretty much irrelevant. If the ebook is worth £5 more to you than the paper one, then buy the ebook. If it isn't, then buy the paper one instead.
Why can Github charge FIVE THOUSAND DOLLARS PER YEAR for a local install of Github and succeed, impressively so, despite a small army of nerds pointing out how inexpensive it is to run one's own Git server and Gitorious? Why does 37signals have an office with walls made of 37signalsium (really, seen it, it's fuzzy) and trendy furniture despite selling software that the nerdosphere can clearly duplicate? Why does Yammer even consider publishing a $5/user/month price for software that is among every web geek's top-5-most-likely-personal projects?
Answer: they don't sell gypsum.
Cost based pricing, which works for gypsum sales but not so much for software, suggests that the price of a nice photo should be the price of the gas to get to and from the photo shoot, possibly divided by the number of people interested in buying the photo, plus maybe throw a couple bucks in there and buy yourself something nice, photographer.
Value-based pricing says, "how much it cost me to create the photo is irrelevant". YES YES A THOUSAND TIMES YES, say the nerds. THAT'S EXACTLY WHAT I WAS SAYING! But value-based pricing continues: "no, what matters is how much it would cost you to make that photo and how much benefit it brings".
How much it would cost you to make that photo: (say) $6000, perhaps divided by the number of different photos you'd take given the same setup (but then also scaled back up to account for the headcount or professional services required to take lots of pictures).
How much benefit? It depends. I could take 10,000 words listing out factors in figuring it out. Most importantly: what are the substitutes to this photo and how much do they cost? For some businesses, clip art of the Eiffel Tower suffices to bring 80-90% of the value. For others (like ad-sales print publications), comparables might also be very expensive.
Now, the extent to which the YOUR business benefit from my photo exceeds MY cost to produce the photo is MY ADVANTAGE IN PRODUCING PHOTOS (the extent to which your cost exceeds my cost is my "comparative advantage"†††, and if it's a positive number possibly suggests that I'm the one who should be doing the photos in any case, since you have better ways to put your money to use). Having an advantage is a good thing. Among other things, it's a key reason why software startups are lucrative, and why we don't all work on line-of-business software for non-software companies.
It's probably true that a photo of a sunset isn't worth $6,000. But, exclusivity aside, the value of the photo also has nothing to do with how much it cost the photographer to take each shot at the margin, and it has nothing to do with the cost to make each marginal sale. What matters is how much it costs the customer to replace that value with a substitute, and in that analysis the $6000 set-up cost, while not determinative, is relevant perspective.
The moralism in these threads is an irrelevant sideshow. Situationally, the nerdosphere oscillates between extremes when trying to compute valuations for stuff with intangible-seeming benefits. Today, the nerdosphere apparently thinks either (a) every photo is a precious snowflake or (b) photo costs should be scaled by the current price of hard disk storage. Yesterday, it was whether it's right for Github to charge per repo. Before that, it's whether it's fair to have markets for spec work like 99designs.
None of that matters. What matters is, is there a market for what you're selling, and will it clear based on the model you use to price stuff on the market. Clearly there is a market for high-quality photography. Clearly it is not a cost-based market like gypsum, or there would not exist sites selling photos with royalties attached, or photos costing hundreds of dollars --- which clearly those sites do exist. So instead of arguing about how much photos should cost --- because, again, they cost what the market says they cost, not what you think it costs to make them yourself --- think instead about how this discussion applies to your own work product. More than you think it does, is my guess.
††† (Actually this isn't all what comparative advantage is; comparative advantage says, if there's a market for widgets and a market for photos and you're better at widgets than photos and I'm better at photos than widgets, then I should do widgets and you should do photos, which is a subtly different idea, but the point stands either way.)