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Price It Below Cost But Make It Up In Volume

December 16, 2013

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(Microsoft Word 6.0 circa 1993, Photo Credit Eli’s Software Encyclopedia)

Thanks for calling Microsoft Support, how can I help you?

Why do you put bugs in your product?

Excuse me?

I noticed you guys started charging for support this year.

Yeah, it’s. . . .

So, now you are putting bugs into the product so we have to call you and pay $75 per call! I don’t think that’s right!

He didn’t actually have a problem he was trying to report. He was just upset that Microsoft was introducing bugs in our products so that people would call support. The computer industry in 1994 was in a state of transition. The internet was about to be adopted by mainstream businesses and consumers and change everything. Support was also changing.

I had just come from WordPerfect Corporation to Microsoft. WordPerfect owed much of its success to its extraordinary support staff. And I was part of that. (You Want A What? We Don’t Even Make Those Anymore!) The company had about 5,000 employees in Orem, UT and about 800 of those were in Support. The support was free. Even the phone call was free. It was a huge expense, the phone bill alone was more than $1,000,000 per month.
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The reason they could offer this fantastic support was that a single copy of WordPerfect cost $495.

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(WordPerfect 4.2 for Dos, Photo Credit: csdn.net)

It was also a great word processor. WordPerfect wrote printer drivers for every printer on the planet. They created different versions of WP for each operating system, DOS, Macintosh, Data General, VAX, Unix, and others.

Microsoft, of course was very interested in cutting into their marketshare. Microsoft did two things that in hindsight turned out to be very smart. First, they developed Windows and put Word on it. Second, they bundled Word, Excel and PowerPoint together into a single product and sold the entire product for $495. We know this product as Office, of course.

WordPerfect had to respond. They missed the Windows boat. But, they attempted to create their own “best of breed” bundle. They included WordPerfect and Borland’s Quattro Pro spreadsheet software. Both sold for $495 separately. Together they were $525.

WordPerfect would eventually lose that war, but they would fight on for months. However, it was in that first bundle that they sowed the seeds of their destruction. The margin, or the amount of profit on the bundle was half of what it was on the stand alone word processor. And the pressure would only get worse to reduce the price. WordPerfect’s vaunted support was very expensive. They couldn’t fight a price war and keep support.

It was during this time that I left WordPerfect to go to work for Microsoft. There was nothing personal about it. I just got a better offer. (How I Became a Pawn In the War With Microsoft.)

Microsoft support was free also, but only for a limited amount of time after you bought the product. And you were limited on how often you could call. Microsoft, like WordPerfect, lost money on support. So, in order to attempt to recover some of the costs, they introduced a paid model. You could call anytime you wanted, but it was $75 per call.

Of course, big companies signed contracts that gave them a number of calls, or incidents, and they paid less per call. But for average users, it was $75. And that’s what my customer was upset about. He didn’t think it was right that we were introducing bugs just so we could turn around and charge customers who needed to call in about them.

He didn’t understand two important pieces of information.

First, no software company introduces bugs. Bugs just happen. In fact, companies spend lots of money trying to eliminate as many bugs as possible. The second piece of information my customer didn’t know, but I did, was how much each call cost us. On average each time the phone rang, it cost us $125 to help that customer. So, the $75 was an attempt to recoup some of the costs. But, we were still a cost center, and probably always would be. The best we hoped for was to someday become revenue neutral. In other words, we would cover our costs.

I think the reason that charging for support was such as hard sell was the awesome job that WordPerfect did in helping an entire generation of customers learn to use computers for free. Like I said, the world was changing in 1994. None of us could really see where it was headed, but having an understanding of where it had been, helped us at least plan.

Rodney M Bliss is an author, columnist and IT Consultant. He lives in Pleasant Grove, UT with his lovely wife and thirteen children.

Follow him on
Twitter (@rodneymbliss)
Facebook (www.facebook.com/rbliss)
LinkedIn (www.LinkedIn.com/in/rbliss)
or email him at rbliss at msn dot com

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