`Razor-Blade' Marketing Reaches Software Industry
PITTSBURGH — SOFTWARE prices are coming down - not as fast as the cost of computer hardware, but slowly and selectively.
The most dramatic move comes from Intuit Corporation, makers of a popular home-finance program called Quicken.
The company is running television ads asking credit-card holders to try Quicken for $8. After 30 days, they're billed another $61.95 if they like the program. If they don't like it, they send in a registration card and keep the program for $8.
Intuit has aggressively marketed Quicken before, but never for $8. The move is part of a historic marketing shift within the software industry. Software analysts liken it to the marketing strategy of razor-blade companies: Sell the razor for a song and make the profits on razor-blade sales.
"You're going to see more of this razor-blade type of marketing," predicts Nancy McSharry, an analyst with International Data Corporation, a market research firm.
"The business strategy has to shift toward the installed base," adds Steven Frankel, director of research at Adams, Harkness & Hill Inc., a brokerage house.
The "installed base" is marketing lingo for a company's current customers. Instead of trying to generate huge revenues through sales to new users, many companies are counting on follow-up sales to current users.
Intuit is using one variant of this strategy. Besides software, the company sells computer checks and other peripherals. Industry observers say the company has decided to make its money off these peripherals, rather than the software itself.
Intuit officials declined to be interviewed for this article. A spokeswoman said the company did not want to give marketing information to competitors.
"It's a variant on all that direct-mail stuff. Processing the return [of the software] costs more money. You might as well let the people keep it," says Don Emery, president and chief executive officer of Reference Software. "We're looking at it ourselves" as a possible strategy. The company sells the leading grammar-checking software, called Grammatik.
Other software companies are taking a slightly different tack. They're selling upgraded versions of their software to current users.
"Upgrades can be a tremendously profitable business," says Rick Sherlund, vice president of investment research at C. J. Lawrence, Morgan Grenfell Inc.
Borland International Inc. set the trend a few years ago by offering attractively priced upgrades to current users, he says.
Even users of a competing program could move up to Borland's spreadsheet and database programs for $100 to $150. Other large software companies have copied the strategy.
At the moment, Borland is marketing its new Quattro 4.0 spreadsheet to current users for $79. That's not as big a profit margin as the $495 Borland charges new users.
But software companies hope to make up in volume what they lose in margin.
It's an open question how far this strategy can go. Not all users will opt to buy a program with all the latest bells and whistles.
Eventually, software companies may find that, like climbing a pyramid, the base of users willing to upgrade will become too small.
But that time hasn't arrived yet, Mr. Sherlund suggests. Many personal-computer users are migrating from the character-based operating system, known as DOS, to the graphically oriented system, known as Windows.
That move guarantees lots of upgrades to new versions of programs that run on the Windows operating system.
VEN operating systems can benefit from low-cost pricing. According to one published report, International Business Machines Corporation is considering giving away its new OS/2 2.0 operating system to Windows users.
IBM is more likely to sell the product at a low price of $25 to $50 than to give it away, these analysts say. Either way, "you solve the chicken-and-egg problem," Mr. Frankel says.
If IBM can get its operating system into the hands of enough users, developers of software will write applications that run on that system.
The more applications that run on the system, the more likely users are to switch to that system. Microsoft Corporation has used the strategy to great effect with its Windows operating system, Frankel adds.
The popularity of low-cost Windows is helping Microsoft sell other software, such as its popular spreadsheet and word-processing programs.
Microsoft is also offering new programs, such as a personal-finance application that competes directly with Intuit's Quicken. Analysts believe the competition from giant Microsoft is forcing the much smaller Intuit to market aggressively.
Large companies with a broad suite of products may have a big advantage over their smaller competitors. They can offer users two new applications for the price of one. "Indirectly, that's pricing competition," Sherlund says.
Lotus Development Corporation, for example, offers users combined spreadsheet and word-processing software for a low upgrade price of $149.
Software prices won't follow the precipitous slide that computer hardware companies have seen, Frankel says. Still, he expects the specials to continue.