Free Is Never a Value Statement
Microsoft giving away unlimited cloud storage and the ongoing cloud pricing wars are doing a disservice to the industry by telling customers that these products and services have no value.
By Larry Walsh
The first rule of product value is always assign a value. Even when something is free, it should have a price — even if it’s just representative — to demonstrate to customers that it has a real value. Microsoft has done a huge disservice to itself, competitors and partners by giving unlimited free storage through its OneDrive service to Office 365 customers. In short, Microsoft has violated this rule.
The major cloud providers — Microsoft, Google, Amazon, IBM and others — have been engaged in a pricing war for much of the past year. They’re trying to use low prices as a means of capturing a greater share of the market, thus locking out competitors. It’s getting to the point where cloud storage and raw computing power are so inexpensive that they’re generating little value for the companies delivering them. Consider what’s happening at Amazon: The leading cloud provider increased subscribers by 90 percent but saw revenue increase only 10 percent.
By making OneDrive storage and file synchronization free, Microsoft is essentially telling the market that there’s no value in the service. Really, if Microsoft is giving it away and it works reasonably well, there’s not much reason to even pay for a premium service. The result: A downward spiral of service and support pricing that will drag down the market and, eventually, make it harder for others to offer services at a reasonable price.
Already, there’s some speculation that this is part of a pendulum swing, with cloud providers bringing their services pricing to near-zero – or giving a service away, as in Microsoft’s case – and then re-introducing premium services at escalating costs. While that’s an interesting strategy, it’s not one that typically works. History has shown that once the market gets something of value for free, there’s very little that can be done to convince customers to pay for a similar offering.
How is Microsoft able to offer unlimited OneDrive service? First, it’s just for consumers, so it doesn’t apply to the more lucrative commercial market. (The “zero-value” message, however, is being received by business buyers as well.) Microsoft is making enough off of escalating Office 365 sales to compensate for the declining OneDrive revenue. In other words, OneDrive is now the loss-leader in the Office 365 proposition.
If this sounds familiar, it should. The industry has seen this picture before, and it eventually causes huge pricing and profitability problems for the channel. We saw this in managed services. When the managed services model was introduced, vendors told partners that managed services would provide consistent, recurring and predictable revenue and profitability. And it did. Except it also came with a catch: declining perceived value in the eyes of the customers.
The problem with all services is that they desensitize customers to the value of their return on investment. Each year, the perceived value decreases by at least half. This forces providers – vendors and partners – to come up with ways to reinforce value to retain customers. Oftentimes, this means adding more service at little to no cost increase. The result is a declining ROI for the provider, and an erosion of real pricing for the customer. Little wonder that managed services profitability fell by as much as one-third in 2013.
Competing on price is a sign of weakness, not strength. Too often, salespeople will resort to discounts, special pricing, and rebates to win customers. Yes, customers are always looking for a deal, and the IT industry is addicted to wheeling and dealing with customers. However, customers value outcomes, quality, and total value more than cost savings. Customers will pay a premium if they perceive value. Unfortunately, it takes time to demonstrate value, and that lengthens sales cycles — something salespeople are loath to do.
A recent IBM study found that customers see value in infrastructure products and services, and are willing to pay for them. They really don’t understand why suppliers are lowering prices. If the product is good and delivers a valued function or outcome, they will pay, and pay well. Apple has demonstrated that time and again with its iPhone: Customers continue to pay a premium price for a device that has plenty of lower-priced, comparable rivals.
Giving something away should not be confused with the freemium model. When a vendor offers a free service for a limited time, its objective is to whet the appetite for the premium, fee-based service. Freemium isn’t always the best model, but it does have a proven track record of producing sales leads and driving sales. Free services, though, cost money as they produce expenses in marketing, infrastructure maintenance, and support.
You can’t drink champagne on a beer drinker’s budget. You can’t drive a BMW when your wallet is made for a Chevy. Your home may be “your castle,” but it’s not actually a castle. Insert your own analogy here, but the bottom line is that people place value on value. Giving things away not only removes all sense of real value; it also renders a product or service indistinguishable from other products and services. Moreover, it makes it much harder to sell add-on support and services.
So, yes, “free” is an attention-getter. And it’s also the eraser of value. And Microsoft isn’t the only vendor guilty of this rule violation. Little wonder the value of cloud computing continues to drop, taking with it future opportunities as the industry educates customers that clouds should equal free or cheap.