I’ve been in this arms race a few different times and, as Jules notes, it can be fun, but the long range outcome is pretty much a foregone conclussion. In the very early days of MIDI, piracy was clobbering Hybrid Arts on their first few products. I did a couple of instrument editors for them, and they implemented Paul Rother’s protection schemes (and Paul was/is no dummy), and I’d find bootleg copies at stores within weeks. 3 decades later, pirate/hacking culture is way more sophisticated.
When Stephen Daystrom set out to write Hybrid Arts new flagship software MIDI sequencer for Atari ST, he asked me to do ‘some sort of hardware key’ (I was the system programmer at a vector graphics company across the street). After some back and forth discussion, I did a super low cost SMPTE interface, which was then, expensive and rare. We also worked out an interesting scheme for sub frame locking. Watching them get the prototype into production hardware was painful, but the combination worked well for quite a few years. The HW was providing a granularity of clock/IRQ control on a handshaking line that was very difficult to properly simulate in software, so you would have to build a clone box. And the price point was super competitive compared to prior solutions at that time. Eventually, the market moved on (and Hybrid Arts drove itself into the ground trying to get into direct to disk recording at the bleeding edge), but the combination of factors worked well for quite a few years.
Another model that has worked ok more recently is free software, but worthwhile paid online service, or worthwhile paid support services. Think of the early days of Quicken. The software was dirt cheap, but the preprinted checks were relatively expensive… But that’s not practical for every situation.
Something I did in the Fortune 500 world is that new engineers would get a fun, no risk, learning project to start. If the results didn’t suck, we’d release them as “Careware”. Just a periodic nag screen asking you to make a charitable donation to one of a long list of charities via a web portal. My employer got good publicity, and contact information (the unlock nag was emailed to you), and my engineers got a moral boost. The charitable dollar amounts raised convinced me that shareware and adware models can work, but they do not automatically do so.
Look at the compaints of Android developers, stuff like 2.1 million hits equals $25 in ad revenue. The same thing with micro commerce. Yes, if you keep the price very low the incentive to pirate goes down. But volume then also has to be high for total revenue to be significant.
Instead of getting discouraged, think of it as a postive. If you create something that people want badly enough to bother pirating, then you have demand. Once you have demand, you can try different ways to monetize it (ads, simple donation appeals, better copy protection, whatever).