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Structuring your Engine/Tools License Cost (as Developer vs User)


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#1 Catmull Dog   Members   -  Reputation: 136

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Posted 14 August 2012 - 12:16 PM

While many have discussed the cost of licensing a game engine or technology as a customer, it's more difficult to find information about how developers should go about determining the license pricing structure for their existing, proven technology.

For example, let's say you as a small business owner have been developing tools for 10 years and you estimate that it cost you $3 Million in time and resources to build a certain product that another company is now interested in licensing (open source).

Should you estimate how many licenses are realistic and divide, say 10 licenses at $300K each?

And for your first customer (who takes more risk) should you maybe say $30K (1% of development cost)? Also consider whether the customer is your employer, and how much extra you would want to provide them the source code to existing tools.

Your input would be appreciated.

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#2 WavyVirus   Members   -  Reputation: 735

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Posted 14 August 2012 - 12:40 PM

I think that taking your development costs and dividing by the expected units sold is generally the wrong way to go about it.

Traditionally price is determined by supply and demand. i.e, you want to find the "sweet spot" where your profit is maximised. A lower price can attract more customers, while a higher price means more profit per sale. You want to find a price such that the extra sales you could achieve by dropping the price wouldn't outweigh the reduced revenue for each sale; increasing the price would drive away customers and the additional revenue would not outweigh the reduced number of sales.

So your price should be influenced by what your customers are willing to pay, and not just what you think your product is worth. This idea of finding the sweet spot is also one of the reasons why we often see what is essentially the same product sold at different prices to different groups of people. If there is a group of people (e.g. students or non-commercial groups) who have some demand for your product, but could never afford to buy it at $1000, then it may be worth your while to charge members of such groups considerably less (as long as you still have some kind of profit margin) to squeeze out the last of the profit. This is also common geographically, where Coca Cola or video games might be sold much more cheaply in poorer countries, for example, as a profit is still made on each sale. By "partitioning" the market in this way we can optimise more effectively.




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