Monday, October 22, 2012

Making the SAL (Spousal Approval Level). Is Microsoft on the wrong side of 400?

At $500, too many competing products are well below the Surface.

Sure, hindsight is always 20-20, but it's still entertaining to look back and be judgmental about past judgments. Shortly after the original iPhone was unveiled back in 2007, Steve Ballmer said a $500 device without a keyboard wouldn't appeal to enterprise users, if anybody. So, last week when Microsoft announced that their Surface tablet would cost $500 without a keyboard and would appeal to enterprise users, I have to wonder if humble pie wasn't being served at the Microsoft cafeteria in Redmond that day.

Early rumors about Surface pricing had the device pegged as low as $200. That would have made it a loss leader for a company which is losing big time in the laptop 2.0 world. Low cost is the strategy Amazon is using in its tablet business and Google is using in its Chromebook push, so cost as a wow factor would not have been an unprecedented market maneuver for Microsoft. Instead, now the Surface device has to go head-to-head with Apple on brand, UI, features and app availability.

Surface is available via pre-order. I haven't seen any sales numbers as of this writing: some reports have it that demand is very strong. It's likely that Microsoft expects a cross-platform halo effect will begin to kick in soon, with the same Metro UI being used on top of Windows 8, Windows RT, and Windows Phone.

Unfortunately for Microsoft, there doesn't appear to be nearly enough Metro interest to create any real halo effect out of the gate. And I'm convinced that Microsoft's tablet is too expensive to create any mass appeal to spill over to other device families.

For Surface pricing, I was expecting Microsoft to go for sub "Spousal Approval Level" pricing in an attempt to build volume to give some backbone to their tablet ecosystem. (Consumer electronics priced below the psychological Spousal Approval Level number tend not to be considered a major household purchase). Spousal Approval Level pricing was often considered to be sub $300, so when the new generation of gaming consoles were introduced a decade ago, it was no coincidence they were all priced at $299.99.

Microsoft's tablet pricing strategy is surprising if the company is looking to gain significant market share in short order. $500 might be a fair price for that solid piece of hardware. But unfortunately for Microsoft the equation doesn't end there. The company needs to allow for the fact that it is the RC Cola of the business. If Microsoft really wants to establish a solid third ecosystem, margins have to take a hit. Why should consumers take the risk when they can get a sure thing with Apple? The higher the risk for consumers, the greater the discount has to be. Lower prices certainly haven't been driving Windows Phone sales.

When your market share is zero, and you're long behind your competitors, and your retail stores appear empty, and your CEO tends to get most things wrong, and you're considered the old, boring man in a young man's game, and you're staring down the barrel of a loaded rifle, and your stock has been stuck in the same range for more than a decade, it's time for a strategy of shock and awe, not pause and bore.

Microsoft is behind the Windows eight ball now. Premium pricing won't SAL the deal.

Pricing is the wow factor:

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