The State of Software, Price and Choice

21st July 2011

So yesterday saw the release of Apple’s latest iteration of their OS X family, Lion. Aside from the fact that this release is download only from the Mac App store, one of the major selling points is it’s low price, just £20.99 in the UK. Also, following on from all of Apple’s recent operating systems there is only one domestic version to choose from.

Before the release of Microsoft’s last operating system, Windows 7, I had hoped that they might have simplified their line up and reduced prices in order to make stepping on board the Windows train slightly easier. But does price and choice really affect the sale of software?

Choice

Just like XP and Vista, Windows 7 was release with three different versions (in Europe), six if you include upgrade versions too, these are:

  • Home Premium
  • Professional
  • Ultimate

When it comes to choice we all know that for most domestic customers Professional and Ultimate are beyond their requirements, but do the customers know that? There’s an interesting study into how customers react to choice, specifically a wide range of choices, in which the following was proven:

When customers were presented with a huge selection of brands of a certain item, fewer customers bought the item than when fewer brands were displayed. The wide selection led to a paralysis of choice – the customers could not decide which brand to choose. As a result, they went away without choosing any.

Now three versions of Windows 7 isn’t exactly massive choice, but when you consider there are also three upgrade versions this presents are rather interesting set of choices to the user, now it’s fair to say a technically minded customer wouldn’t have a problem selecting the version they want, but what about the average user?

Price

Before the launch of Windows 7, Microsoft announced the UK pricing as follows, upgrade prices in brackets:

  • Home Premium: £149.99 (£79.99)
  • Professional: £219.99 (£189.99)
  • Ultimate: £229.99 (£199.99)

Their cheapest offering was £150 for a full version, whether this is considered cheap or not is subjective, as is value for money. However in recent times we’ve seen a rise in low cost software and it’s been proven lowering the cost of software can increase sales, thus increasing revenue vs normal sales of a high cost unit.

Valve (creators of the Steam platform) ran an experiement where they asked are games too expensive?, they reduced the price of a game in the hope that it would lead to increased sales. Not only did sales increase but so did revenue:

Discounting games does not only increase unit sales–it increases actual revenues. During the 16-day sale window over the holidays, third-parties were given a choice as to how severely they would discount their games. Those that discounted their games by 10 percent saw a 35% uptick in sales–that’s dollars, not units. A 25 percent discount meant a 245 percent increase in sales. Dropping the price by 50 percent meant a sales increase of 320 percent. And a 75 percent decrease in the price point generated a 1,470 percent increase in sales.

Low cost software isn’t restricted to the gaming community either, look at applications in both the Mac App Store and the iOS App Store, millions of people were happy to chance a dollar (less than a pound) on the Angry Birds game and that’s claimed to be one of the most profitable games in history.

Could this work for operating systems too? Mac OS X Lion is available for only £20.99 in the UK, less than most of the software that needs it to run! Not too scientifically Lion hit the top paid app spot on the Mac App Store pretty quickly.

Disclaimer: I know Lion is only available to Snow Leopard users at present, and a USB option will be available in August to others at a cost £55, granted twice as expensive as the download only version.

My Thoughts…

Considering (as of this post) that in the last year Windows has lost over 3% of it’s market share compared to a 0.3% increase against Mac and a 2.5% increase for iOS platforms, I think Microsoft will have to do something to slow down / reverse it’s market share decline, would changing it’s strategy with regards to choice and price work? I think it would, I cannot help but think a simple proposition would give them a strong product to pitch to customers.

We’ll just have to for the Windows 8 release in 2012 to see exactly what approach Microsoft will take.

 

What are your thoughts on the matter, is reducing price and choice a good thing? Who are the winners and losers of this type of strategy? I’d love to hear your opinions in the comments below.

 

  • http://pluslion.com Jamie Knight

    Nice post ben, i think the issue is a case of business models. Microsoft and Apple are working on completely different business models, Microsoft is a Software company, thats does a little bit of hardware.

    Apple is a hardware company (in terms of financials) which makes software in order to sell its hardware. Apple announced the first day sales of OSX Lion were over 1 Million copies, that is about £20,000,000 on day one.

    Apple spends a massive amount each year on R&D (3rd largest spender in the world as it happens) so the cost of developing lion is actually very low compared to their total R&D expenditure. As it brings people to the platform (and Apple hardware profits) the software only really has to break even to be worthy of investment.

    Microsoft on the other hand thrive on the software update fee, they have a somewhat saturated markets, so by lowering costs they will probably not make all that much more money. Something like 70% of MS profits come from selling OEM & Enterprise software. I would argue that boxed W7 copies only make up a small proportion of those sold. For Microsoft it makes a amount of sense to keep the price of boxed copies high, to act as an incentive for users to simply replace their computer (as it will most likely to be running W7 anyway.)

    Another aspect to consider is support, if you purchase a boxed copy of W7 your support is provided by microsoft, if you purchase it through your new computer then the support is provided by the computer seller.

    So this is a long way round of saying OSX is so ‘cheap’ as it only need to break even and differentiate Apple hardware line. By selling it cheap they move the platform forward which simplifies support costs.

    Microsoft on the other hand are incentivised to not really sell a boxed copy of the OS, but to sell to the OEM and enterprise markets. They must make a profit in these markets to remain competitive. I am willing to bet that consumer OEM (Asus, Dell, HP etc) pay far less than the cost of Lion for each copy of W7 they install.

    Hope that helps, an interesting post and i am also very excited to see what happens with Windows 8.

    Cheers,

    Jamie

  • http://www.saqibshaikh.com Saqib

    Well written post – you make some good points.

    You address the cost of OS upgrades, but since the value of an OS is zero without having a computer to run it on, I think it’s impossible to completely separate the cost of hardware, software, and support (Jamie addresses this last point). It’s probably worth considering the cost of hardware+software over the lifetime of the machine.

    macs are more expensive upfront, with cheaper software later on. Equivalent PCs are less expensive upfront, but if you want to keep up with the latest software, that cost is much higher.

    Disclaimer: I do work for Microsoft (on Bing) but these are just my personal opinions – I do own both Macs and PCs.

  • http://mellewynia.nl/english/ Melle

    Interesting read!

    One of the big differences between a new Mac OS and a new Windows version is that the new Mac OS presents significant improvements over the previous version for nearly everyone.

    On the other hand every new Windows version is – I think – regarded as completely new by the wide public. This makes a big part of the wide public hesistant to upgrade while they don’t see any reason to upgrade, since they want to achieve exactly the same: “However it looks a lot nicer, it won’t probably get me an improved experience, or just faster from A to B.”

    There seems to be in every new Mac OS release evolutionary improvements for everybody, whereas a new Windows release feels much more revolutionary.

    One of the things Apple seems to be doing really well is that they seem to be able to hype the most
    important improvements and features.

    Low cost software (upgrades) can make it less riskier to just buy something you might actually like. This way people will easier and quicker buy after considering to do so.

    @Sabiq, I think you should compare the costs of the software and hardware with the productivity. However that is hard, some studies prove that effectiveness can prove a lot cheaper than just the low cost option.