You recently released some software - Banana Crop Foundation Server 2005(TM) - which allows users to plan, track and report on their banana crops, improving their operational efficiency measurably. You have some competitors in the space - some even inexpensive or free, several of them open source - but they aren't nearly as comprehensive or intuitive as yours.

Sales are brisk and times are good. While you're charging a fairly hefty licensing fee, the price is small compared to the benefits your software brings to your users (users whose profit margins increase because their competitors are still doing things the old-fashioned way). Congratulations! It is an enviable position for an ISV to be in.

Things aren't all puppydogs and lollipops, however. You've heard through the grapevine that many of the smaller banana producers have taken to your software, but finding your fees too high they've resorted to pirating it.

Annoyed by this "unmaterialized revenue", you do some number crunching and find that they couldn't afford your software anyways. At least not at a price that would make it worth your while. You also know from impromptu surveys that they'd just use the free stuff anyways if push came to shove.

What should you do? Should you super-size your copy protection? Should you pursue legal options against these miscreants? Are you really losing anything given that these non-paying users wouldn't buy your software anyways?

This is a very interesting software positioning and economics question, and it isn't nearly as clear-cut as it appears to be at first glance. The typical reply many would come back with is that "they wouldn't be paying customers anyways. Be thankful for the free advertising and look the other way". Others would say that you should provide a gratis or very low cost "small producer" version that would give these producers a leg-up: Maybe one day they'll grow and become a major customer.

The problem with that line of thinking is that it overlooks the core competitive advantage that your software brings to your paying customers

The problem with that line of thinking is that it overlooks the core competitive advantage that your software brings to your paying customers: Each user - legal or not - is being viewed as an island rather than a rich ecosystem that feed off of each other. For instance if every banana producer has the software, then Big Co has effectively gained no advantage buying your software, and in many ways it is now coming at a net loss (because they're paying for software that merely puts them on an equal footing with their competitors. Competitors who are using it for free).

You can see this sort of piracy and price positioning quandary in many places. The small graphics designer saves up enough to buy a copy of Photoshop CS, yet instead of gaining a professional advantage, he's merely even with countless competitors who just downloaded it from a torrent. Similarly, from a global perspective many large software companies overlook software piracy in the developing world, or they offer their wares at a substantial discount, yet what happens when all of their high-paying development shops, paying tens or hundreds of thousands in licensing fees, close up, unable to compete against the coding dens running their entire infrastructure with marginal software overhead?

In mainstream culture, where to many it is a fight to keep up with the Joneses, the same sort of thing occurs with media piracy - if two kids get an allowance, and one pirates a copy of the latest cool CD and spends his allowance on a cool T-shirt, and the other instead spends his money on a legal copy of the CD, the latter is culturally a loser - he is falling behind the Joneses. Unless there is morally or legally enough of a risk to piracy, the former has "won" in the equation. Naturally the latter is going to reconsider his options the next time allowance day comes around.

On the flip side, if you fight piracy too hard and you might encourage the evolution of open source competitors. The more difficult Photoshop is to acquire and use, the more improvements GIMP is likely to see, because let's face it: To most users it's the gratis freedom that matters a lot more than the libre freedom.

All in all a very complex problem with no clear answers. It certainly isn't as clearcut as "if they wouldn't pay for it anyways then they aren't a lost sale".