Over on TechCrunch, there is post about the new Mundu chat software for the iPhone that I have to take issue with. It makes some ridiculous statements about the price and pricing of software, but if you can get past (and discard) those statements, the argument may be sound.

In a nutshell, Mundu wants to charge $11 lifetime to use their web-enabled iPhone chat software/service, and Nick thinks they are out of their minds to be charging money. He makes two statements that are absolutely ridiculous in defense of his argument:

1) “There are way better ways to monetize software. Offer a free version and drop an advertisement …”
2) “The marginal production cost of software is zero. That’s what the price should be.”

If there are “way better ways to monetize software”, then why are two of the richest people on the planet sellers of software? Being a fan of all the new concepts, services and software falling under the Web 2.0 umbrella, this is the one part of this movement that I can’t always agree with; software should be free, supported by advertising. I can’t find the site now, but several months ago I went to a new Web 2.0 service that was launching, and on its front page it said something like “It has become accepted that this type of service should be free, and be supported by advertising”. Wow, way to be proud of the service you’ve built and the expectations of your users. You’ve just said your software isn’t worth much to your users, and its best feature is that it can be turned into a billboard.

Next, we have the almost-always true statement “The marginal production cost of software is zero.” followed by the utterly ridiculous “That’s what the price should be.”. Yes, that is one of the beautiful things about software compared to hard goods; the marginal cost of production of a web service/software is zero. Marketing guys love to take this fact and extrapolate it into all kinds of falsehoods, like “therefore the cost should be zero”, or “so giving away 100 copies for free costs us nothing.”. Wrong. What really matters is the marginal cost of distribution, the cost to have another person use the software. There are support costs, upgrade costs, and for web services, additional server and bandwidth resources, which cost more money. Having the marginal cost of production be zero means you can put a zero in your spreadsheet for that category, where you could not for physical goods, and that’s all, nothing more.

If I can take serious liberties with what Nick has written, I think under there is a good argument. If we can say “There are way better ways to market this type of software at the point in time they find themselves”, then there is value here. As he notes, Mundu’s main challenge is to get a critical mass of users before Apple releases their own chat application for free. To do so, he asserts that Mundu needs a freemium pricing model; free with advertisements, or paid with no advertisements. I’m a big fan of this model, as it allows users to try the service, and make some money from the users who would never pay for it in the first place. It also allows users who find it valuable to pay for it, and clear up some of the valuable screen space (incredibly valuable on a handheld device) that would have been taken up by ads.

However, getting a critical mass of users to beat the big guy to the punch is not the only way to make money, nor is it the best. The best way is to make a superior product, and people will have no problem paying for it. I know this for a fact, because I am in the middle of a 14-day trial period for some contact software for my Windows Mobile phone that is far superior to the built in stuff, and I’ll definitely pay the $30 after the trial is up.

So the takeaways from this are: 1) If you want to make some money, and the 800 pound gorilla is breathing down your neck with his free version, make a superior product, and serious users will pay for it. For the rest of the users, monetize them with ads. 2) Having the marginal cost of production of software be zero only means that it is a cheaper thing to manufacture than a physical good. Nothing else.