Once upon a time, there were three basic ways to make money: Selling raw materials. (Steel. Wood. Tungsten. Bacon.) Selling crafted goods. (Computers. Chairs. Socks. Hi2u, China!) And selling your time providing services. ("Welcome to Walmart. Welcome to Walmart. Welcome to Walmart.")
In our brilliant modern age, we have also invented a new way to making money: Selling information. Music. Books. Computer games. And all of these new, information-based ways of making money have one thing in common: Everyone can rip you off easily all the time, and you can't do anything about it. Start hating it now. Punch a pillow. Get primal scream therapy. Be angry.
Then get over it.
You want to pirate the PC version of my newest game, Avadon: The Black Fortress? Search for it on The Pirate Bay. You can get a free copy in less than the time it takes to read th... Oh, you got a serial number already? Told you so.
Do you think I'm dumb for revealing this secret? Well, it wasn't a secret. Everybody who isn't really old knows how to get all the free music, games, books, and movies they want. Every year, the percentage of consumers who know the arcane workings of BitTorrent increases. It'll get worse before it gets better.
Oh. Wait. It won't get better. Ever.
(Note that this is for PC and Mac games. Piracy is far less common on iOS and such, but you also need to charge far, far lower prices. It kind of balances out.)
Big companies are determined to go down fighting piracy, using increasingly draconic methods of customer punishment. It's kind of fascinating to watch, seeing the titans of industry squeeze out a few more dollars with the minor incidental cost of pooping on the reputation of an entire industry.
But this can't be your way. Blizzard can afford to require a constant online connection for single-player Diablo III, no matter how much of a gratuitous irritation that is. They're Blizzard, and everything they make will do great. (Until it doesn't.) Your resources, on the other hand, are limited. Unless you write a purely online game (a very costly and difficult proposition for a small team), you will have to face the fact that whatever DRM you scrape up will be blown away like tissue paper.
Then the first step is to accept that piracy happens. Take a long, deep breath. Cast your eyes to the heavens. Sigh. And then focus on the sliver of customers who will actually pay you for your work. The goal is to make a game with the bare minimum of DRM necessary to nudge honest people to register, and then, after they do, leave them alone.
This is because you need to bear in mind the business you are really in...
I don't really make a living selling games. I sell an ethical life.
How could I make a living selling games? Anyone who wants to pay me for my games doesn't have to. It's not like buying a chair, where they'll chase you down and taser you if you grab it and run out of the store. Nobody who wants my game on Windows or Mac has to pay for it to get it. Frankly, most of them don't.
So why do people pay for it? Because they understand a fundamental fact: For these games to exist, someone has to pay. If everyone just takes it, I'll have to get a real job and the supply will shut off. I don't want to get into one of the eternal tedious arguments about "software piracy". I will instead focus on one single, incontrovertible fact: I have a family to feed. If nobody pays for my games, I can't make them.
So what does someone get when they pay for my game? They get the knowledge that they are Part of the Solution and not Part of the Problem. They know that, in this case, they are one of the Good Guys. It is well-earned self-satisfaction, and it is valuable. To know they are doing the right thing, some people will happily pay 20 bucks. This is how I stay in business.
This means that I am very, very careful to maintain a good public image. I try very hard to be likable and engaging and generally not a jerk. I don't always succeed, but I try. The goal for an indie developer is to get people to like you. If they don't want to help you stay around, they will help someone else.
This is one reason, of many, why the move toward super-strict DRM in PC games is fundamentally wrong-headed. If you get people to like you, they will pay money to support you. If you get people to hate you, however, they will make it a point of pride to rip you off, even if they don't want or have to. If you are a jerk, you will make it feel better to rip you off than to pay you. When The Pirate Bay exists, this is a very bad strategy.
So be nice. Be friendly. Offer attentive, individual support. Write quality products, and maintain them properly. There is only one way in which you can't afford to be a nice, lovable guy. If you sell niche games, you have to charge an actual price.