Thesis work paper Check Pricing Structures

Check Pricing Structures
Hence in software turnarounds, many turnaround managers immediately reduce their prices to increase quantity. E.g. lowering the price of the software product “ClassPharmer” helped in Bioreason’s turnaround (Holtzman, 2004) (See Appendix C), while increasing the price further differentiated Microsoft’s Office Professional from its standard product offerings (Shapiro & Varian, 2000).
Shapiro (Shapiro et al., 2000) argues that the economics of the software industry requires differentiated pricing due to the high labour and marketing costs.
Further, Blumling (Blumling et al., 2002), states that software firms are in effect “in a double jeopardy game”. He observes
“Software companies benefit when their performance is rising, as their return on invested capital can exceed 50 percent and grows extremely quickly. During a downturn, however, they are hit twice once for their actual financial performance and again for what it implies about the value of their assets. If insolvency looms, investors flee because there are few residual assets to divide”.
Pricing for software is made even more difficult because firms have to factor in other additional costs. For example because technology depreciates rapidly, the average time constraints on selling software is two years (Shapiro et al., 2000). Next the firm has to ensure it has the sales volume and resulting sales costs necessary to amortise the R&D, recover the cost of selling the software and factor in the cost of supporting the software.
Davidson (Davidson, 2001) in addition, states the difficulty with selling software is that traditionally software firms have failed for one of two reasons:
• The firms sales costs were too high, or
• The firm doesn’t sell enough of the software to recoup the cost of developing it and it’s cost of capital.
These conditions ensure that inaccurate pricing will only lead to one generation of the product. Shapiro (Shapiro et al., 2000) warns that support costs can be particularly high, a view supported by Davidson (Davidson, 2001).
One form of strategic repositioning to avoid the double jeopardy scenario is to move away from selling software itself, to “opening up and supporting” the source code.
Davidson cites the example of Netscape using this strategy when it was competing against Microsoft.
Netscape’s turnaround involved repositioned itself and changing it’s business model rules by opening up its Netscape Navigator source code and then charging customers for supporting it.
Likewise Shapiro notes that software and other information firms frequently merge together when times are tough. As a turnaround strategy in markets where competition is fierce, merging together can help both ailing firms outlast other competitors. The irony of this situation, it that normally mergers occur once the firm is on its was to recovery, rather than in decline. The advantage of merging is that it is easier to reduce the combined staff head count, while allowing for better negotiation terms with venture capitalists and banks over new funding.
In many turnaround situations, the general recommendation has been to sell off the firm and let the buyer fix it, rather than merge with another company. It could be inferred that turnarounds and mergers in this industry are perhaps more concerned with personnel, capability retention and strategic issues than operational restructuring, because software companies have relatively few fixed assets.