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Comment by alttag | Hacker News Reader

  > Objective Value:
  > (Hourly rate × Development time in hours) − Price = Value

Um, no. This assumes the value of the product is based on the inputs, and is incorrectly modeled from the seller's perspective. Any product's value is determined by the buyer, who is the one making the purchasing decisions. The value is not in how much time the developer put into it, but what it does.

Yes, the article is about subjective value (and finding it), not objective value, but taking the developer's (biased) perception of value as a starting point is a bad idea.

Pricing should be determined early in the development process to inform go/no-go, and the amount of development effort to apply. Starting from scratch on pricing after the product is ready is backward.

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One of my favorite anecdotes about that comes from an article found here (can't remember the exact article): The author (a developer) went along with their lead salesperson on a call to MIT. After demoing the product, which normally sold for $150k, the MIT rep asked about the price. The salesperson immediately said "$1 Million" - the MIT rep chuckled and said, "Oh come on, that's ridiculous - you know we don't pay more than $650k for software." The salesperson responded, "Ok, we'll let you have it for $650k - now let's talk extras."

So yes, price is a function of demand first - don't tell the customer what it's worth, let them tell you.

I think the author was Steve Blank. I have an MP3 where he mentions this happening, but I can't for the life of me remember the name. You can probably find it on IT Conversations.

I was expecting this to end with a couple of kids at MIT built the thing for free and open sourced it.

I think you're referring to this story: http://venturehacks.com/articles/pricing

Agreed. Value, price, and cost are three independent variables. When they line up advantageously, you have a viable product. But one does not determine the others.

Good point. There are actually four variables - one of them is usually money though, so we don't think about it that much. The four are

   buyer price (= contracted price + opportunity cost to buyer)
   buyer value (what the product is worth to her)
   seller cost (cost to create product + opportunity cost to seller)
   seller value (value of what he will be receiving in return, usually face value of money)

You misread that - the hourly rate and dev time in hours refer to the buyer (a developer) having to develop a functionally similar product (instead of purchasing it).

That's how I read it as well. It doesn't matter though, it's still the wrong way to look at pricing. Value, price and cost are not at all related.

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