Producers cut their prices to woo customers


May 13, 1991|By William M. Bulkeley | William M. Bulkeley,The Wall Street Journal

Once upon a time, software makers asserted that pricing played no part in customers' purchase decisions. Customers looked at features, user support programs, future directions, compatibility -- everything but price, the marketers said.

But now, price wars -- the bugaboo of mature product lines like color televisions -- are being waged in the personal computer software business.

Three of the industry's biggest players are engaged in vicious price promotions for their spreadsheets, wooing one another's customers with cut-price offers and giving away complimentary products.

International Business Machines Corp. recently halved the price of its OS/2 operating system in an effort to compete with Microsoft Inc.'s Windows. Now, word processing is emerging as a pricing battleground.

Most software makers predict that the current round of price promotions will end this year and won't permanently hurt lofty profit margins. And they are trying to wage their price wars without actually cutting the prices that most customers pay.

But the industry is playing a risky game. Customers rarely pay list prices for software anyway. Now, savvy buyers can often get top-quality software for less than half the discounted "street prices" offered by mail-order houses and warehouse stores. Software buyers could become as addicted to deals as auto buyers are to rebates.

William Zachmann, head of Canopus Research, Duxbury, Mass., notes that price-cutting strategies are tempting because software production costs are tiny compared with the $300 discount price for much business software. Moreover, top-selling products in each category all perform the same basic functions and incorporate most of the same special features, making premium pricing harder to explain.

To be sure, list prices aren't changing. And mail-order prices have actually edged up in recent years because software publishers have stopped the quarterly discounting to resellers that they once relied on to meet sales targets. Robert Weiler, senior vice president, sales and marketing, at Lotus Development Corp., says: "I don't think prices are eroding." But he concedes that "spikes of tactical pricing are going on."

For years, PC software vendors avoided price competition because customers were wedded to a few standard products. Corporate buyers, in particular, remained loyal to Lotus' 1-2-3 spreadsheet, Wordperfect Corp.'s WordPerfect word processor and Ashton-Tate Corp.'s dBase data-base software. Each carried a list price of $495 or more and sold at discount for $250 or more. Buyers decided it was better to pay the price than risk having unpopular software. Retailers preferred the profits they made on expensive software.

Software publishers kept developing upgrades of their software that they sold to existing customers at a cut price. But they kept high prices on the products and snickered at suggestions that consumers wanted lower prices. Says Mr. Zachmann of Canopus Research: "Every industry comes up with some explanation of why they're exempt from the laws of the marketplace. The fact is, any bozo can write software, and often they do."

In 1989 Borland International Inc. of Scotts Valley, Calif., began pushing what it called "competitive upgrades" -- industry jargon for deep discounts for people who switch from a competitor's product. It sold its well-reviewed Quattro spreadsheet to 1-2-3 users for $99. And it began cutting into 1-2-3's 70% market share. "Borland really set the whole pricing issue on its ear," says Robert Brown, an Atlanta consultant.

The current round of price cuts exploded with customers' move to Microsoft Windows, a graphical operating system that makes many software programs easier to use. Windows has been selling like hot cakes, and vendors are racing to develop Windows software. Microsoft, which has a big head start in the Windows market, hopes to dislodge the established leaders in spreadsheets, word processors and graphics. To grab or hold market share, many of Microsoft's competitors have resorted to cutting prices.

Richard Pickett, president of Merisel of El Segundo, Calif., the second-biggest software distributor, says the price wars reflect vendors' desperation to capture market share in the Windows market. "People believe the quicker they get out with a product and the more installed base they have, the better it will be for them long-term," he says.

Lotus still isn't ready to start selling its Windows version of 1-2-3, but as market leader, it won't want to risk cheapening its key product. To counter Microsoft's thrust, it gave away its $495 Ami Pro word processor for Windows with each sale of its high-end 1-2-3. The action seeded Ami Pro in a lot of companies that hadn't tried it previously, Lotus says.

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