Pricing can be somewhat of a dark art when approached from a software background. However, there is some guidance that can be helpful in trying to decide what you should charge for your product. Pricing is been deeply studied in both business and economic. This post cannot replace the advice of experts. In a start-up you really need an idea of where to begin. The ability to hire experts comes after you are already making money. Here are three ideas for establishing price.
- Pricing by market neighbors
- Value to the customer
- Revenue maximization analysis
One of the questions that comes up is where and how does the intellectual property process fit within the context of building a start-up. This is important because much of what we do in getting a start-up off the ground is to tell prospective customers about our ideas. Doing this at the wrong time and in the wrong way can damage your ability to patent your key technology. For simplicity we can think about the following five activities in a start-up company.
- Finding the pain
- Finding a solution
- Finding investors
- Selling the company
see: Intellectual Property, Patents, Patent Strategy
Patents should be thought of as more of a strategic or economic asset rather than a legal one. Yes the legal process is used in the enforcement of a patent, but that is frequently a last resort.
see: Intellectual Property, Patent Process, IP in the start-up process
This discussion of strategic decisions that surround patents in a software business will address three ideas:
- Defensive publication
- What to patent
- Patent portfolios
Patents are an important part of an intellectual property strategy. This post discusses the process of obtaining and defending a patent.There are other posts that discuss strategic uses of patents.
see: Intellectual Property, Patent Strategy
This discussion of patents is based on U.S. law, which is similar in many respects to patent law in other countries. This is also meant as an overview to guide strategic thinking about patents. Consult a patent attorney for details.
A patent is the right to exclude others from using your ideas in exchange for public disclosure of those ideas. This right of exclusion is limited to 20 years after the filing for the patent. For a patent to be valid, it must be original and non-obvious. These two criteria are important and are the basis for obtaining and defending a patent. The original requirement is so that patents protect inventors. What society wants is to reward the creation of new knowledge. The invention must not only be original but non-obvious. The test is “obvious to someone reasonably skilled in the art.” For example, if you have a new web technology it must be non-obvious to other web programmers at the time you filed for the patent. The fact that it was non-obvious to web users does not matter because they are not skilled in the art of web programming. The time of filing also matters. If all web programmers understand your approach today, that does not matter. It is only obvious if most web programmers understood your approach at the time you filed for the patent.
This is somewhat of a simplification, but there are generally four steps to the patent process.
- Provisional application (optional)
- Full application
- Granting the patent
A key part of maintaining a strategic technical advantage is intellectual property. Intellectual property forms a “barrier to entry” that keeps competitors at bay. Careful attention to intellectual property (both your own and that of others) will prevent a number of future problems. Remember that to make money you must create a situation where you essentially have an advantage in the marketplace that is difficult for your competitors to overcome. You need the breathing room to develop your solution and your market. This is particularly true when the potential competitors are very much larger than you are.
warning: There are a number of legal issues in this post. This post is no substitute for good legal advice.
A key concept about intellectual property is that it only gives you the right to sue someone for violation. You cannot force anyone to do anything. Intellectual property only allows you to stop other people from doing certain things and provides legal remedies for what they have done. Also these posts should not substitute for good legal advice. The purpose of this discussion is to help you craft an intellectual property strategy. To execute your strategy, find good legal counsel.
This overview of intellectual property is based on U.S. law. Other countries vary in detail but the principles are generally similar. Again, consult a lawyer for details.
Types of intellectual property
There are four types of intellectual property that relate to a software business. They are:
- Trade Secret
Trademarks are essentially part of the branding of your product and are more part of your marketing effort than your technology effort. They will not be discussed here.
One of our key themes is validation of assumptions. There must be a relentless quest to get our most important questions answered as cheaply and as quickly as possible. The phrase “If we build it, they will come” only works in the fantasy of the movies. Entrepreneurship is about risk. Successful entrepreneurship is about intelligently mitigating those risks. The key to mitigating those risks is to validate our assumptions. Throughout we will pursue a process of:
- What is our assumption?
- What are the consequences of our assumption being wrong?
- How do we validate our assumption?
- What is our response?