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Friday, 29 February 2008 22:01

Wow: Microsoft decides now is the time to lower Vista pricing

Could it be that after years of Windows pricing remaining steady, then going dramatically up with Vista (as hardware prices declined) – that Microsoft has finally learned cheaper prices can actually increase profits?

With the news that Microsoft has decided to lower the cost of Vista comes a simple lesson from Economics 101: charge less for your product –
while still making a profit – so you can sell more products to more people, and actually find your profit increasing overall.

The opposite strategy is making more money from less people by charging more for your product, something Microsoft seems to have tried, and presumably failed at, especially with the ridiculously overpriced Windows Vista Ultimate.

We all know which consumers prefer – a more affordable product that more people can easily purchase, resulting in a much larger user base.

Microsoft appears to have finally learned this lesson after 30 years in business, and the revelation seems to have surprised them! What a pity it has taken so long, as this lesson in pricing is well known throughout history and really is not only obvious, but common sense!

CNET’s Ina Fried put it this way in her article on the topic of Microsoft lowering their Vista prices:

“In an interview, newly minted Windows consumer marketing vice president Brad Brooks said that Microsoft had been testing lower prices over the past few months and was surprised to find that the amount of revenue lost was more than made up for by an increase in the number of PC buyers willing to shell out for an upgrade”.

The official news from Microsoft that they are lowering Vista prices comes in the form of a Q&A session with the aforementioned Brad Brooks, the corporate vice president for ‘Windows Consumer Product Marketing’.

While there is no word on whether or not OEM computer manufacturers will also see a drop in Vista pricing, the Q&A notes that Microsoft is lowering the cost of the retail stand-alone editions of Vista, something that will delight anyone that needs to buy a retail copy of Vista.

This could be for a number of reasons, be it to load in a virtual machine on their PC or Mac, or to upgrade an existing XP computer to Vista – although the price drops vary from country to country – some getting a full edition, while others can only access the upgrade version.

So, what has Brad Brooks had to say on this rather unusual development from Microsoft – and why has Microsoft decided that ‘now’ is the time to start some pricing ‘wow’? Please read onto page 2.

According to the Q&A, Microsoft wants to grow the number of retail copies of Vista it sells, especially after seeing sales success in test markets where pricing was lowered.

Microsoft’s Brad Brooks said that ‘emerging markets’ would see Vista Home Basic eliminated, replaced instead with Vista Home Premium at a lower price, with Vista Ultimate also seeing a price drop, and with these versions of Vista being full retail copies, and not upgrade versions.

CNET’s Ina Fried noted that US consumers would see Vista Home Premium drop to US $129 from $159, and Ultimate falling to US $219 from $299 for the 'upgrade’ versions.

Update: I've since discovered that Microsoft IS lowering the price of full retail copies of Vista Ultimate in the US, down to US $319 from $399. What a shame Microsoft didn't eliminate all the different retail versions of Vista altogether and simply go with one: Vista Ultimate - at Vista Home Premium pricing.

Microsoft’s Q&A report says that “These price changes will take effect globally with the retail release of Windows Vista Service Pack 1 later this year, though some markets will see reduced prices sooner as a result of promotions many of our partners already are driving, such as in the United States”.

So Australia should see price drops too for Vista sometime later this year – a long needed development, especially when Vista Ultimate costs well over AUD $700, a ridiculous price for software, especially considering the strength of the Australian dollar against the US greenback.

Brooks then explained that although 100 million licenses of Vista had been sold in the past year, Microsoft sees “an opportunity to grow our business even more with some of the new editions we introduced with Windows Vista”.

Continuing, Brooks said that: “Today, the vast majority of Windows licenses are sold with PCs; retail stand-alone sales, in contrast, have been primarily from customers who value being early adopters and those building their own machines. We’ve observed market behavior, however, that suggests an opportunity to expand Windows stand-alone sales to other segments of the consumer market”.

Brooks noted that Microsoft had “conducted promotions in several different markets combining various marketing tactics with lower price points on different stand-alone versions of Windows Vista”.

Further explaining, Brooks said that: “While the promotions varied region to region, one constant emerged – an increase in demand among consumers that went beyond tech enthusiasts and build-it-yourself types. The success of these promotions has inspired us to make some broader changes to our pricing structures, to reach a broader range of consumers worldwide”.

One can only wonder why Microsoft didn’t think to run this experiment earlier – but I guess it’s a case of better late than never!

So why else has Microsoft dropped Vista pricing – and why will pricing still nevertheless vary from region to region beyond what we've just read Brooks saying? Please read onto page 3.

Microsoft’s Brad Brooks says that “The desire for the best value remains the same” all over the world. He’s saying people like cheaper prices and value for money as though it’s some kind of amazing revelation.

He notes that: “Our research, along with feedback from promotions by our retail partners, has illustrated powerfully to us the degree to which customer needs vary, not only between developed and emerging markets, but also within markets. But the desire for the best value remains the same. As such, the Windows Vista editions involved and specific price decreases will likewise vary from region to region across the globe”.

The Q&A questioner at Microsoft asks Brooks: “Why has Microsoft chosen to announce this reduction now?”

Brooks explains that as Vista SP1 goes to retail, when the price drop is set to officially kick in, that Microsoft are trying “to make this as easy and efficient as possible for our retail partners to update their displays once”.

However Brooks concedes that many people buy Vista pre-loaded onto their new computers, and that this “isn’t going to change because of what we’re announcing today”.

But he notes that “it’s a great opportunity for our retail partners to sell more stand-alone copies of Windows, and help grow this small but important part of our business. At the same time, it will also enable more consumers worldwide to experience the benefits of genuine Windows software”.

CNET’s Ina Friend explained that some analysts thought lower prices might ‘damage Vista’ and its reputation, potentially causing some people to think less of Vista, but Brooks said that lower prices in the test markets of France and the UK in December and January saw sales go up – not down.

Fried also quoted Brooks talking about the massive tens of millions of extra sales of Windows XP Media Center Edition per year once its cost was lowered to being just marginally higher than Windows XP Home Edition – rather than the one million sales per year they were achieving when Media Center was priced much higher.

So, Microsoft has finally learned an important economic lesson. Lower prices can mean higher profits, happier customers and, importantly, legal customers.

Don’t stop now, Microsoft – as the threat of Mac OS X and Linux grows ever stronger, and with Windows 7 still years away, actually making your products much more affordable can stave off the competitive threats – and make you more money!

But please don’t think that lower prices will make us forget the debacle of Vista’s birth, and the madness of SP1’s botched release.

There’s still plenty of pricing room to move further downwards if needed - on all your software products, and chances are that ever stronger competitive pressure, even from the likes of online software such as Google Apps, you’ll need to lower prices again in the future, probably sooner rather than later.

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Alex Zaharov-Reutt

Alex Zaharov-Reutt is iTWire's Technology Editor is one of Australia’s best-known technology journalists and consumer tech experts, Alex has appeared in his capacity as technology expert on all of Australia’s free-to-air and pay TV networks on all the major news and current affairs programs, on commercial and public radio, and technology, lifestyle and reality TV shows. Visit Alex at Twitter here.

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