I’m not quite sure what Microsoft is up to regarding its Surface pricing scheme, but it is making mistakes left and right. An $899 price tag is simply too damn high.
Back when Microsoft was a mischievous monopolist playing dirty every chance it could, this would never have happened. One of the tricks up its sleeve was the effective practice of lowballing the competition.
During the long-forgotten encyclopedia wars of the CD-ROM era, Microsoft virtually decimated the competition by lowballing its Encarta encyclopedia, offering cheap bundling deals to computer makers. Within a couple of years, there was no competition. Microsoft coasted with the product, selling discs and eventually online access.
In 2009, the company lost interest and shuttered the Encarta operation. Microsoft to this day tends to get bored quickly and bail out. In the process, it can do a lot of damage to a market. At least, it used to in the past. Now? Not so much.
The x86-based Surface should be priced lower than $899. As someone who prides himself with price point sensitivity, I’m going over-the-top and proclaiming that this product would take the world by storm at $399.
Yes, and you can mention this $399 price up to anyone and they’ll tell you they’d buy one. To me, even $499 is too high, so you can only imagine what I think of $899.
Let’s reverse engineer these prices. The old rule of tech manufacturing used to be that the retail price should reflect nothing more than four times the bag of parts. You don’t factor in research and development or cost of manufacturing. Don’t even get me started on software pricing.
Over the past decade, there has been some indication that the retail pricing has actually been three times the bag of parts. Let’s go with that theory regarding the Surface. The product is selling for $900, so the bag of parts is probably $300. It’s just that simple. If the bag of parts is in fact $300, I see no reason why Microsoft cannot bite the bullet and sell the thing for $399.
This would generate massive sales and probably drop the price of the parts down to $100 eventually, getting the product a premium margin.
As an aside, I was in discussions with someone deep in the mobile phone business and he told me that as of today, the cheapest bag of parts for a smartphone is $75, meaning that at four times, the cheapest smartphone would sell for $300. At three times, it would be $225. Just so you know. I see no reason that this $75 bag of parts cannot be reduced to $10. A smartphone has no moving parts. It’s just chips and a screen.
But I digress. The point I’m trying to make is that Microsoft wants to get into the hardware game but it seems to be approaching it in some gentlemanly manner. It’s very much unlike what we are used to seeing from the company. What is the point of all this pretense?
Of course there is always the fear that at $399, the company may be losing $100 or more per unit when all is said and done. This would not be so bad if the sales were moderate, but, in fact, at that price, the sales would skyrocket and potentially cost the company millions in losses.
Microsoft went through this process with the Xbox 360, losing tons of money and coming out of the other end of the tunnel a winner. The same thing would happen with the Surface and the company doesn’t have to go broke selling millions of these tablets at a huge loss. It can sell out and complain that it’s so popular that there is a shortage, thus creating an even bigger demand. There are a lot of things that can be done.
I can assure you $899 is not going to create stampede, or much of anything other than a collective yawn.
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