178 / 2024-04-22 17:50:20

Software Pricing in the Presence of Hardware Sales: To Sell or Lease?

selling and leasing,bundle,dynamic pricing

Many firms offer durable products that encompass primary hardware (e.g., vehicles) along with ancillary software (e.g., autopilot software). Some of them opt to lease the software, while others choose to sell it, either through intertemporal price discrimination or via bundled pricing with the hardware. Motivated by these diverse software pricing practices, we study whether a monopoly firm should lease or sell the software when jointly setting prices for both hardware and software. When the hardware is absent, leasing is often superior to selling, as it avoids inefficiencies associated with intertemporal price discrimination. However, we demonstrate that when the cost of the hardware is moderate and consumers have highly heterogeneous valuations for both software and hardware, selling can exploit this consumer heterogeneity more effectively than leasing, leading to higher revenue from consumers with intermediate valuations for the entire product. The specific form of the optimal selling strategy is contingent on consumer heterogeneity in the hardware, shifting from intertemporal price discrimination to bundled pricing as this heterogeneity increases. Our study highlights the impact of hardware costs and consumer valuation heterogeneity on optimal software pricing strategies. Our findings are particularly relevant to professionals in industries currently transitioning from hardware-focused to software-oriented.