Sub-$300 PCs and SKU proliferation

As reported yesterday, Wal-Mart has started selling a Sub-$300 PC that runs Windows Vista just in time for the back-to-school shopping set. Though the machine won't win any performance awards, it still strikes me as "not so bad" for a $300.00 PC. It sports an 80GB hard drive an a 1GB of RAM. I remember when those bullet points would have placed it squarely in the high end.

Of course, the version of Vista it runs is Windows Home Basic, not Windows Ultimate, a requirement if the $300 PC isn't going to be the $700 PC. That got me thinking, however, about the phenomenon of SKU proliferation at Microsoft.

Currently, there are four SKUs for Windows Vista - Vista Home Basic, Vista Home Premium, Vista Business and Vista Ultimate. Rumors prior to release implied that the number might even reach as high as 8. Fortunately, Windows Vista for nudists and people who like to stick straws in their ears never saw the light of day (hey, I'm a Microsoft employee, so I know such things).

SKU proliferation isn't confined to desktop operating systems. Microsoft Office 2007 comes in eight varieties, Office Standard, Office Home and Student, Office Small Business, Office Professional, Office Professional Plus, Office Enterprise, and Office Ultimate. Visual Studio, Microsoft's set of tools for developers, comes in 13 varieties, depending on how you count them.

Microsoft's enthusiasm for slicing products into differently priced bundles is clearly accelerating. Such enthusiasm, however, is not a pecularity of Microsoft, but is common demand curve profit optimization activity.

A demand curve is an analytical abstraction that charts the number of people willing to buy a product at a given price point. At lower prices, the number of interested buyers goes up. At higher prices, the number of buyers goes down.

If you set your price at one position in the curve, however, you sacrifice all the potential revenue from people who were willing to pay more for the product, but didn't have to, as well as those lower in the curve who won't buy the product simply because it is above the price they are willing to pay. An ideal would be a price that is infinitely variable, but such a thing is pretty much impossible without mind-reading devices or a guy named "Bill" in Dallas, Texas who put no prices on any of the music in his record store and decided what you should pay for the album when you got to the checkout (I hated Bill, and based on the prices he charged me, he hated me, too).

So, you end up with multiple price points. Unlike airlines, however, its hard to get people to pay different prices for the EXACT same product. You get the same too-small seat in a flying metal tube irrespective of whether you paid three times the price of the person sitting next to you. Feature differences, therefore, must be created, and that is what has occurred in the Microsoft product line.

Is SKU proliferation a good or bad thing? I shrug my shoulders. As I've noted in the past, I buy cheese all the time that I know was likely to have come from the same Wisconsin manufacturing line, but which is priced differently based on branding and labelling. At least when I buy a different SKU, I am getting nominally different features.

The point, however, is that Microsoft's behavior isn't "abnormal."  It's just an extension of a common pricing strategy to the software business, akin to Apple's extension of fashion branding to computing. It's how companies make money from computer products.