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Tim Worstall is an Englishman who has failed at many things. Thus his turn to writing, the last refuge of many who could make a living no other way. He is, as an example of his business and financial perspicacity, the head of the international scandium oligopoly: the only commodity which has not risen in price in the past decade.
By | Tim Worstall 23rd May 2012 10:02

Why on Earth is Microsoft moving to Euro pricing now?

Time to take a sniff at the coffee, perhaps

Analysis I find it quite amusing that a company would decide to have uniform pricing right across a continent in a currency that looks like it might not survive the phasing in period of the new pricing regime. But that's what Microsoft seems to be doing.

As El Reg has pointed out, pricing is now to be standardised on the euro price list right across Europe. The joy of which is that UK based customers could see price rises of up to 29 per cent.

My amusement comes from peering at such things through the lens of a theory of economics rather than the practicalities of the IT trade, it should be said. That particular theory tells us that far from a company wanting to have a clear and simple and comparable price list, said company should have one as complex as possible allowing the maximum deployment of smoke and mirrors to confuse customers over the real price.

The thought is that you want to differentiate between your customers. For some of them will be simply overjoyed to pay more money for your quite lovely products while some others will only grudgingly scrape the bottom of their change purses for what you're trying to flog. The trick is to sort out which is which, and then charge them those different prices: thus maximising total profits.

Not that we're suggesting this is Microsoft's actual objective.

Think of it this way: you're an iced coffee retailing chain called, oooh, St Arbucks. You know that you have some customers, recent beneficiaries of an overpriced IPO perhaps, who will happily pay you over your usual $3 a glass.

However, you don't know who they are. One not entirely phantastical chain solved the problem by offering to add the sugar to the tea, then shake it in, for an extra 50 cents. Those who take this option are those gullible rich and you've managed to charge them more: while still being able to serve that mass market at that $3.

Software, given the negligible marginal cost of production, is even more open to this sort of manipulation. Further, given the problems of illegal copying, you want to do as much of this price discrimination as you can. There's that bloke with the moussaka on his tie who would just borrow his cousin's copy if the price were anything over €30. That guy munching the frankfurter wouldn't dream of offering you less than €300 for the same thing and of course the Simple Shoppers that are governments would like a €700 copy for each and every civil servant. Luckily for the public sector, its buyers will be exempt from the Microsoft price rises on volume licensing when the Public Sector Agreement 2012 launches on 1 July.

A single price right across such different environments is exactly what the economist, or to the extent that these are different things, the business strategist, would not recommend. Rather, there should be different versions of the product available in different territories with different prices so as to be able to maximise total revenue. It's all about getting that €30 out of that very reluctant purchaser while making absolutely sure that you don't lose any of the €300 and €700 sales.

It's not as if Microsoft doesn't know these things: that's how we get to have versions of the flagship operating system called Home, Business, Power and Might Actually Work With Enough RAM. It's doing exactly the same thing there, differentiating the offering not according to how much it costs to provide (just the one endlessly duplicated CD of the full system is obviously cheaper than these variations to produce), but rather according to how much it thinks each class of customer might be willing to cough up.

So, given that complexity is what you, as a seller, want in a pricing system, why is the company now moving to greater simplicity?

It appears that it's actually all about internal fighting. For as the £ depreciated against the € recently, Microsoft's internal salesmen – and channel partners – found themselves fighting among themselves. Someone working out of Microsoft UK and selling into, just as an example, France, could undercut Microsoft France's salesman pursuing the same account by as much as 20 per cent. Which would mightily piss off Pierre even as Peter was cashing his bonus cheque.

Which leads us to somewhere interesting. From the company's point of view, from the revenue maximisation point of view, we would want to have a complex series of tariffs. So that salesmen could extract, assuming that they're good salesmen, the maximum possible from each customer by being able to play with offerings and prices.

However, the system is moving away from this to a more transparent one price to all system. The reason for this is to keep the peace within the company. To keep the employees and managers sweet.

This has its own name in economics: the principal/agent problem. The shareholders want maximum profits and damn the internal allocation of sales among territories. But the interest of the insiders, those agents, diverge from those of the principals at times. As here, where a single price stops poaching across territories at the arguable price of reducing price differentiation, market segmentation and thus total profits.

But back to what amuses: there's a six-month delay before Service Provider License Agreement (SPLA) customers start to feel the brunt of these price rises. And it's not entirely certain that the euro, the currency upon which the entire plan is based, is actually going to survive another six months. Certainly, large and clever banks (to the extent that these even exist) are predicting up to a 75 per cent chance that one country at least will leave the eurozone before that six months is up. And behind them are the catastrophists who insist that if one goes then others will follow toppling like dominoes.

So it is, you know, an interesting time to be basing the pricing structure on the euro.

It's also true that it doesn't actually solve the perceived problem, of those internal account teams stealing revenue from each other. UK prices are going to rise 20 to 30 per cent as a result of this change. But US prices are already 5 to 10 per cent cheaper than the current UK prices so we're opening up a gap across the Atlantic of 35 to 40 per cent perhaps. Which should probably be enough for at least one or two people to start phoning the +1 dialing code rather than +44 or +49 to be getting their desired software – of course they'd have to be US-based ops with offices in Europe. While European customers can't buy MS product from US, American customers with offices in Europe can buy MS software at US prices for their overseas operations.

Which leaves us with: will this increase in price discrimination between those who can bear to deal with American salesmen and those who cannot increase profits sufficiently to overcome the internal strife of those sales teams who see “their” revenue being booked over there? ®

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