Avi Greengart is an expert on the convergence of technology and entertainment: video, audio, computing, and wireless, how these are coming together, and what's likely to survive long enough to make a difference in your life.
Column 20 January 23, 2002
Why Does It Cost More to Buy Software Direct?
I've got a software marketing question that has been burning in my mind ever since last year. I buy Turbo-Tax Deluxe for my taxes. Ever since I started buying the product and registering it, I've been getting e-mails, mail promotions and even a phone call to entice me to purchase TurboTax on-line. The price for the deluxe version is $39.95.
But the product has just gone on sale in the stores for $29.95 -- this $10.00 differential between the on-line purchase and at the store was also the case last year. Why would anyone want to buy the product on-line for the privilege of spending $10.00 more, when he can buy the same thing at a store for the lower price? Of course the on-line version offers a whole bunch of freebies [for the $10.00 I suppose]… perhaps that is the difference.
Seems like it's more expensive to buy direct than to buy at the store, right? It is. And it's done that way on purpose. Most companies that manufacture commodity products don't sell direct because direct sales and order fulfillment is not their specialty. Most companies that manufacture specialized products don't sell direct because their products require services -- help with the sales process, customization, or installation. However, software companies often sell their products on their websites because it's relatively easy to do, and provides a way for customers to buy their product even if they don't have a store or reseller in their area (a lot of direct software sales are to overseas customers).
The TurboTax story is a bit more complicated. It's actually a brilliant -- and somewhat unique -- approach to a complicated problem. It's all about "channel conflict." Here's the problem: you're Intuit, and you've sold TurboTax through retailers for ten years. That's great, but you want a direct connection to your customers -- partly to gather information to improve your product, mostly so that you can market other things to them. (You know that they liked your product enough in the past to buy, so they're your best shot at new business.) The way to do this in the past was by mail order; today, direct marketing and catalogs still work, and then you have the Internet, which is like mail order on steroids. What's more, low cost packaged software is a low margin business, and you're trying to move Intuit towards making money on web-based services (like life insurance brokerage), which is much more profitable. A direct connection to the customer is critical.
But wait - if you go direct to the customer, the retailer will revolt. Remember, retailers have a lot of clout - you'll lose a LOT of sales if Staples and Wal~Mart stop selling your product because they're afraid you're competing with them for the sale.
In marketing terms, this is classic "channel conflict." Different channels of reaching the customer competing with one another - and they all want exclusivity, or they may shut down your access to their customers.
Intuit's approach was (and continues to be) to put retailers first - it's their biggest channel, and that makes it critically important. You have to give Intuit credit, this bit of common sense was NOT self-evident during the Internet bubble. How does Intuit put retailers first? Retailers get to sell the product for the lowest price. (Although the price is sometimes lowest only after a manufacturer's rebate, that doesn't seem to bother retailers - they advertise the price after rebate, and say "after rebate" in tiny print.) Intuit then offers customers a way to order directly from the company, but not in a favored way in terms of pricing, and most people still end up buying from a retailer. To make it attractive enough to get people to buy direct, they add in all kinds of goodies if you order direct - none of them worth all that much, but I'm sure Intuit has marketing people that have done studies to find out what offer gets the best response. The folks who are willing to buy online are the cream of the crop for an increasingly web-centric Intuit - they're the customers Intuit wants direct info on anyway (to cross-sell other products, and increasingly, services). So Intuit has figured out a way to maximize channel usage: it gets as many elite customers it can to buy direct, and ensures that the retailers are happy to stock - and sell - to everyone else.
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© 2001, 2002 Avi Greengart