Microsoft Gets Price Warnings from its Customers

Microsoft is introducing Windows 7 to replace its unpopular Vista operating system. The company is at logger heads with its PC manufacturing customers over pricing for the new software.

Here are two of the problems. First, Microsoft intends to charge $50 for an entry level version of the operating system, called Windows 7 Starter Edition, which is triple the price the company gets for the cheapest version of Windows out now. Microsoft charges between $60 and $150 for Vista today, but the PC manufacturers can use the older Windows XP for roughly $15 for netbooks, the only growing sector of the PC market. If Microsoft raises the price for the cheapest operating system to $50, the PC makers have to raise their prices or lose all the profits they have on the netbooks. Second, Microsoft plans to charge an additional $200 for the Windows 7 Home Premium edition. This additional cost would increase the price of a mid-range PC by 50%, from around $400 to about $600.

The PC customers have seen significant changes in their market. Competition has increased and prices have fallen. The average notebook, the source of most profits in previous years, has seen a price decline of about $800 from $1400 in 2004. The average notebook now costs less than the average desktop.

These PC manufacturer customers have an important message for Microsoft. (See Video #1: The Two Best Consultants in the World on StrategyStreet.com.) They are Microsoft’s key channel of distribution. The customers are telling Microsoft that, if the company charges these prices, sales volumes will fall for both the PC manufacturers and for Microsoft. Microsoft would be well advised to listen to these customers since Microsoft makes a lot more on the average PC than does the PC manufacturer. Microsoft can not, for long, operate at cross purposes with these PC manufacturing customers. High prices to these customers push them to alternative software suppliers. (See Video #7: Constraints on the Ability of Competition to Expand on StrategyStreet.com.)