Simple formula to calculate your algorithm pricing

Very often I talk to talented engineers, who tell me that they are unsure of how to price their projects and work they do next to their job. Here is a quick and simple proposal of how you can get an idea of how much you should charge for your algorithm. We will start by calculating lifetime price and then continue to monthly price.

The formula for a total lifetime price consists of multiple variables outlined below:

a) Work effort (WE) = How many hours of work did you spent on the algorithm? (Unit: hours)

b) Work Price (WP) = How much € do you want to charge per hour for your time? (Depending on your experience this can vary from 50€ to 200€ — start low and go up to see how customers react) (Unit: €)

c) Other Costs ( C )= How much other costs did you have during development? (Like licenses, data, tools, platforms, infrastructure) (Unit: €)

d) Number of Buyers (B) = How many customers do you expect will buy your algorithm over it’s lifetime? (Split the price across multiple customers to generate income more quickly and still pay off all the costs) (Unit: None)

If you have these numbers, it is very easy to calculate a lifetime price.

TLP = ((WE * WP) + C)/B

To get a total monthly price is as easy as calculating a lifetime rate. The monthly rate takes into account, that some customers cannot pay for the full algorithm upfront and would rather try it for a couple of months beforehand. To get the monthly rate you need to consider the following variable:

a) Algorithm Lifetime (AL): For how many months will your algorithm be usable by the customer? Take into account, that someone else might create a qualitative better solution or create a solution, that is cheaper or processes faster. I would argue, that you should come up with a value between 6–24 months in regular cases.

TMP = TLP / AL

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