One of the side effects of using the iPhone App store so much is that it's started to fundamentally alter my perception of software pricing. So many excellent iPhone applications are either free, or no more than a few bucks at most. That's below the threshold of impulse purchase and squarely in no-brainer territory for anything decent that I happen to be interested in.

But applications that cost $5 or more? Outrageous! Highway robbery!

This is all very strange, as a guy who is used to spending at least $30 for software of any consequence whatsoever. I love supporting my fellow software developers with my wallet, and the iPhone App Store has never made that easier.

While there's an odd aspect of race to the bottom that I'm not sure is entirely healthy for the iPhone app ecosystem, the idea that software should be priced low enough to pass the average user's "why not" threshold is a powerful one.

What I think isn't well understood here is that low prices can be a force multiplier all out of proportion to the absolute reduction in price. Valve software has been aggressively experimenting in this area; consider the example of the game Left 4 Dead:

Valve co-founder Gabe Newell announced during a DICE keynote today that last weekend's half-price sale of Left 4 Dead resulted in a 3000% increase in sales of the game, posting overall sales (in dollar amount) that beat the title's original launch performance.

It's sobering to think that cutting the price in half, months later, made more money for Valve in total than launching the game at its original $49.95 price point. (And, incidentally, that's the price I paid for it. No worries, I got my fifty bucks worth of gameplay out of this excellent game months ago.)

The experiments didn't end there. Observe the utterly non-linear scale at work as the price of software is experimentally reduced even further on their Steam network:

The massive Steam holiday sale was also a big win for Valve and its partners. The following holiday sales data was released, showing the sales breakdown organized by price reduction:

• 10% sale = 35% increase in sales (real dollars, not units shipped)
• 25% sale = 245% increase in sales
• 50% sale = 320% increase in sales
• 75% sale = 1470% increase in sales

Note that these are total dollar sale amounts! Let's use some fake numbers to illustrate how dramatic the difference really is. Let's say our hypothetical game costs $40, and we sold 100 copies of it at that price.

If this pattern Valve documented holds true, and if my experience on the iPhone App store is any indication, we've been doing software pricing completely wrong. At least for digitally distributed software, anyway.

In particular, I've always felt that Microsoft has priced their operating system upgrades far, far too high -- and would have sold a ton more licenses if they had sold them at the "heck, why not?" level. For example, take a look at these upgrade options:

Putting aside schoolyard OS rivalries for a moment, which one of these would you be more likely to buy? I realize this isn't entirely a fair comparison, so if $29 seems as bonkers to you as an application for 99 cents -- which I'd argue is much less crazy than it sounds -- then fine. Say the Windows 7 upgrade price was a more rational $49, or $69. I'm sure the thought of that drives the Redmond consumer surplus capturing marketing weasels apoplectic. But the Valve data -- and my own gut intuition -- leads me to believe that they'd actually make more money if they priced their software at the "why not?" level.

I'm not saying these pricing rules should apply to every market and every type of software in the world. But for software sold in high volumes to a large audience, I believe they might. At the very least, if you sell software, you might consider experimenting with pricing, as Valve has. You could be pleasantly surprised.

I love buying software, and I know I buy a heck of a lot more of it when it's priced right. So why not?