get a good price when purchasing certain items. On the other hand, they’re willing to pay a premium for products that let them treat themselves.
I recently visited a BMW dealership. I was looking at a car, and a salesperson steered me toward another part of the lot. He led me to a car called the M5 and made a point of telling me that BMW had manufactured only 2,000 of them. The price was steep, let me tell you—but the salesperson told me, “If you buy a Porsche, you’ll be one of the masses. If you buy this car, you’ll be one of the few.”
The M5 may cost a fortune, but there are customers lining up to get one. It’s amazing what people will pay in order to stand out—and it’s important to factor that customer inclination into your assessment of a stock’s worth.
everything. You didn’t have to be a photography genius to figure them out. They were so simple to operate that they were a valuable addition to any household, and because of that they became a mass-market item, as opposed to a specialty one.
Similarly, the remote control led an entire generation of tele- vision viewers to go out and buy new sets. A television with a remote made watching so much more enjoyable that scores of con- sumers decided it was worth replacing their old sets just so they could utilize the new technology.
Expanding Customer Benefit
Yahoo! started off with a bang. It was the most compelling portal on the Web. Soon, though, other companies began to replicate Yahoo!’s services, and customers had absolutely nothing to lose by switching to someone else.
In order to transform its visitors into loyal customers, Yahoo!
created My Yahoo!, a new service that allowed its users to customize Yahoo! to suit their individual tastes and interests. It took awhile to jump through all the hoops, and optimizing My Yahoo! required frequent updates. But customers who went to the trouble could get a Yahoo! home page with their favorite news filtered for them, real- time stock quotes on their favorite investments, and more.
Not only was this a benefit to the customer, it provided Yahoo!
with some much-needed stickiness. The customization process took a long time, and customers who’d gone through it were much less likely to jump ship. If they switched to another portal, they’d have to start from scratch.
Another example of expanded customer benefit comes from the airline industry. Carriers were having trouble convincing travel- ers to choose one airline consistently, so they introduced frequent- flyer clubs. Repeat customers were offered free travel, upgrades, preferred seating, and other perks for sticking with one airline, as opposed to shopping around. Rewarding customer loyalty with expanded benefits revolutionized the airline industry. Visa took things one step further by introducing a credit card that allowed customers to rack up free air miles. The result was customer alle- giance and a chunk of American Express’s market share.
The Package Deal
A price war, if a company is intent on fighting one, can be waged without a true cost advantage by bundling a product with some extras. Let’s face it, there’s nothing quite like the light in a cus- tomer’s eyes when he or she is offered “something for nothing.”
An astute company can use this universal customer truth to its advantage by providing a package that appears valuable to the cus- tomer, but costs only marginally more to produce than the original product.
The most obvious example is the cosmetics gift set offered to customers who spend a minimum amount at the counter. The gift sets are primarily made up of sample-size moisturizers and makeup overstock, but women flock to department store makeup depart- ments to cash in on the freebies. In order to do so, they usually must buy more than they had originally planned, as the minimum amount is cleverly set to be just slightly more than the price of any individual product. Nevertheless, both customer and business benefit.
The fast-food market has turned package deals into an art form. Let’s say a guy goes into McDonald’s, craving a Big Mac. At the register, he’s told that for 50 cents more he can add fries and a soda. Even if he wasn’t planning on buying them, at thatprice he’ll usually spring for the Value Meal.
The Suite Spot
Microsoft is not McDonald’s, but its employees may have picked up a thing or two from too many fast-food runs. The Microsoft suite concept is the Value Meal of software.
Before the introduction of product suites, a customer had to separately purchase word-processing, spreadsheet, graphics, and database programs. Each one had a fairly substantial cost, and there was no monetary incentive to buy them all.
Microsoft decided to shake things up by bundling its Word word processor, its Excel spreadsheet, and its PowerPoint graphics program into what it called a suite.Conceptually, Microsoft was say- ing that for about 50 percent more than you’d pay for one appli- cation, you could get three.
96 the big tech score
Three for the price of one and a half! This brought the price per application down by 50 percent. When Microsoft first intro- duced the suite concept, many analysts thought the company was crazy. They were convinced that the suite packaging would eat away at Microsoft’s revenue.
I saw things differently. When I looked at what was in the suite, I realized that there wasn’t much overlap between the users of each of the products. In other words, each product’s penetration into the others’ camps was fairly low. I decided that if Microsoft could sell the suite to its customers, revenues would actually rise, because people would be convinced to pay for more than they’d usually buy.
Think of the suite as an all-in-one stereo or an automobile option package. A customer looking to buy a CD player may be swayed to buy a stacked system that costs marginally more, but includes a tape deck and amplifier. A car buyer may arrive at the dealership wanting to buy a baseline model with air conditioning.
But he or she may be convinced to pay marginally more for an option package that includes air conditioning, mudguards, and wheel covers—extras that bring the bill up significantly but cost the dealer next to nothing. Similarly, the cost to Microsoft of cre- ating a suite was extremely low. The biggest expense was the pack- aging, which the company kept to a minimum.
I liked the suite strategy because I saw that it would allow Microsoft to collect more total dollarsper customer. If Microsoft could get the Big Mac fan to pay a little more for the fries and soda, so to speak, it would be a win-win situation. The average cus- tomer would buy 3 applications instead of the previous average of 1.1 applications (see Figure 7.1).
Customers like freebies, but they aren’t stupid. When creating a suite, companies need to make sure that the individual products within it are attractive in their own right, and the products need to have perceived value in order to be attractive. Otherwise, cus- tomers think they’re buying something cheap, rather than some- thing valuable.
Suites also need to make a sensible package. A value meal that includes a Big Mac, hot cakes, and six McNuggets isn’t as attractive a package as one with an Egg McMuffin, hash browns, and coffee.
It’s vital for a package deal’s success that the products within it complement each other.
Smoking Out the Competition
The best thing about the package deal is that it helps to prevent trespassing. Before introducing suites, Microsoft competed with WordPerfect, Software Publishing, Lotus, Borland, and a slew of other companies on a single-application basis. Each program had to fend for itself. Word competed with WordPerfect. Excel had to contend with Lotus 1-2-3. PowerPoint was up against Harvard Graphics.
Once suites entered the picture, the rules changed entirely.
Now it was the team that mattered most, not the individual players.
Gone was the need to be the best in each category. A strong combi- nationof products was the key to victory. Microsoft began the suite race with a huge advantage—the company was the only contender with compelling products in all three product categories.
Microsoft’s head start forced competitors to try to join forces.
Software Publishing trolled the waters for partners. Novell bought WordPerfect and Quattro Pro. Lotus acquired Ami Pro.
The pressure to integrate took its toll. Novell’s market share plummeted while the company tried to fuse the old and the new.
98 the big tech score
General Analysis
POWER- TOTAL SUITE
WORD EXCEL POINT PRICE PRICE DISCOUNT CONCLUSION
$230 $230 $225 $685 $375 45% Bad
Mike’s Analysis
AVERAGE TOTAL SUITE ADDITIONAL
PURCHASE PRICE SPENT PRICE REVENUE CONCLUSION
1.1 products $230 $253 $375 48% Good
Figure 7.1 Analysis of Microsoft’s Suite
Strategy.
Novell’s profitability eventually became so endangered that it had to sell WordPerfect, for a song, to Corel. Lotus, which had acquired Ami Pro in order to create a suite, ran into problems integrating Freelance, its presentation product, and fell very far behind. Software Publishing, creator of Harvard Graphics, never came to an agreement with anybody and was eliminated from the competition altogether. In short, all the competitors encountered problems trying to unite, integrate, or create a set of applications that could compete with Microsoft, whose products were already among the best of the breed in every category.
After the smoke had cleared, only two major competitors remained: Lotus and Corel. Lotus sold itself to IBM. Corel was hanging on by its fingernails.
Pricing for the Masses
One of the things that made Microsoft such a superpower was Bill Gates’s philosophy of pricing for the masses. Gates started out with a simple motto, “A computer on every desktop,” and he priced software in a way that would help make that dream a reality. In fact, if it hadn’t become a reality, the pricing probably would have driven his company bankrupt. In order for Microsoft’s pricing to work, its products had to reach mass-market distribution.
Pricing software low enough that the masses could afford to buy it was somewhat revolutionary, but it made perfect sense to Gates. If the company sold its software to every single hardware vendor and got them all to bundle it with their machines, the unit cost to Microsoft on each piece of software would be essentially nothing. Plus, Microsoft would achieve massive acceptance at almost zero cost of goods. Thousands of hardware vendors could also load tons of software onto their machines for less money, mak- ing their computers more valuable to the customer.
There’s a very famous memo that was sent to John Sculley by a young Bill Gates. In the memo, Gates urged Sculley (the CEO of Apple) to license the Mac operating system and make it available to hardware vendors other than Apple. If you do this, Gates promised, Apple will become the dominant vendor in operating systems. Sculley ignored Gates’s advice. After all, Apple could
make lots of profits on each unit if it didn’t open it up. If Apple licensed the Mac OS, there would be competition, and maybe Apple wouldn’t make as much money.
Here lies a major difference in philosophy. Whereas Apple felt it was better to make more money on each of hundreds of thou- sands of units, Microsoft felt that it would eventually sell 100 mil- lion units and make plenty of money.
In a way, Gates was heir to the throne of the great monopolists like Henry Ford. In 1908, Ford changed the future of the auto- mobile industry, not only by inventing the Model T but by figuring out a way to produce it so inexpensively that it would be affordable to the masses. Ford’s assembly line process changed the entire eco- nomics of automobile production and sales.
Bill Gates could well be called the Henry Ford of his generation.
Conceptually, Microsoft has thought things through for software in precisely the same way that Ford did for automobiles. The car man- ufacturers before Ford handcrafted each car and made it to the specifications of a single customer. Similarly, before Microsoft, a lot of the software manufacturers created a custom piece of software for a single type of hardware. Software development costs per unit were astronomical because all software was proprietary.