Monday, October 09, 2006

Microsoft Points on Seeking Alpha

Microsoft's Latest Marketing Scheme: Pinching Pennies Off the Customer

Largely unnoticed in the pricing announcement last week was this little tidbit about how consumers might pay for Zune music. CNET had a pretty decent description in their article, where they accurately noted that Microsoft's real play is to get people to buy subscriptions for $14.99 a month. But if pressed, they'll generously allow people to buy individual songs. But you can forget one-click buying; Microsoft (MSFT) has a cuter idea:

There will also be the option of purchasing individual songs through a system called Microsoft Points. The new Microsoft cash system will work by adding money to an account, as with a prepaid phone card. Points will then be deducted from the account with each purchase. A single song will cost 79 points, "the equivalent of 99 cents," according to Microsoft spokeswoman Kyrsa Dixon.

The point system is already used in the Xbox Live Marketplace, and Microsoft plans to host other online stores where Microsoft points can be redeemed, according to Katy Gentes, product marketing manager for Zune. In the United States, points are available in denominations of $5 for 400 points, $15 for 1,200, $25 for 2,000 and $50 for 4,000. That makes $1 worth about 80 points.

Now from a marketing point of view, there are two marketing tricks going on here. First is the concept of not having 100 points equal a dollar. That would be too simple and easy to understand. Instead, Microsoft sets the song price to 79 points, which most people will perceive as being inexpensive because it is less than 99. Cute, very cute.

The second marketing trick is the use of a new form of currency; yes, Microsoft money has finally arrived, and it has all the charm of an end user licensing agreement -- and just as many tricky parts. Note the denominations offered above and think about this common transaction: buying your average, garden-variety album for $9.99. You'll need probably 799 points to buy that. But notice that there's no 800 point denomination. Microsoft is betting that most consumers won't buy two 400 point packs, but will instead opt for purchasing 1,200 points for $15, and will leave the extra 400 points on account with Microsoft. So consumers end up either 1) doing extra work to pay exactly the right amount (i.e., going to the store, purchasing two 400 point packs, returning to the music purchase and then buying their album), or 2) provide an interest free loan to a company that has $40 billion in the bank. Cute, too cute by half.

Microsoft seems to take particular glee in making consumers work harder than necessary to buy their products and grabbing every fraction of a penny they can squeeze out of the transaction. If the company spent half as much effort investing in, say, making a truly elegant hardware device (instead of just re-badging someone else's) and making the user experience simple and hassle-free with one-click credit card payment (it worked for Amazon (AMZN), didn't it?), they'd probably make more money in the end than pinching pennies with tricky pricing and proprietary money schemes.

Someone once said that the lottery is a tax on people who are bad at math. Maybe Microsoft intends Zune Marketplace to be a tax on people who like marketing tricks. It might work, but it's no way to build customer loyalty.

Full disclosure: I own shares of Apple Computer.

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