What Microsoft Could Learn From McDonald’s

Robby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sales of Microsoft’s new Surface tablet are uninspiring. According to Forbes, which cited Detwiler Fenton, Microsoft probably will sell between 500,000-600,000 Surface tablets in Q2 of FY2013, while the company had estimated tablet sales to be between 1 and 2 million. Microsoft (NASDAQ: MSFT) is a veteran tech company with the resources to develop its own tablet; the company has the cash to invest heavily into R&D, and the tablet market has been booming. With all these conditions favorable to Microsoft, why are consumers turned off by their new device?

This isn’t an article about the usability of the Surface tablet; this is an article about Microsoft’s strategy for its grand entrance into the tablet market. With Microsoft pricing the Surface at $499 and up, I’m surprised that they’re surprised that sales for the device haven’t skyrocketed. The PC market is declining, so I applaud the company for making this bold move to evade obsolescence, but Microsoft needs to be realistic about its price point. Does Microsoft think of itself as a premium brand? Personally, I’ve always been loyal to Windows PCs solely because their cost is so low. Once upon a time, I considered purchasing a Macbook Pro – a truly premium laptop – but after realizing the cost was at least double that of a Windows computer with similar specifications, I stayed with Microsoft’s ecosystem. I would always prefer to buy two or three Windows laptops for the same price as one Macbook.

Now, with Windows pricing its tablet at roughly the same price as Apple’s iPad, Microsoft eliminated the only competitive advantage it had. Microsoft products don’t compete on the basis of luxury, they compete on the basis of price. If Carl the Consumer is looking for the trendiest technology, the most extravagant computer, or the most stylish devices, he’ll probably buy it from Apple (NASDAQ: AAPL).

Apple is a company that never offers discounts – their users pay full-price all the time, every time. The company has the leverage to command high prices because its products are premium products – Apple has a monopoly on the Apple brand, and the market is willing to pony up the cash to own it. Microsoft, it seems, isn’t able to generate quite the same level of enthusiasm to justify Apple-level prices.

The only way for Microsoft to get a foothold in the tablet market is to undercut Apple’s price. Microsoft might even lose money by reducing the price of its tablet, but the initial loss would be worth it. Microsoft needs to lure users back into their ecosystem and vitalize sales of its peripheral devices. The company’s new operating system – Windows 8 – depends on widespread adoption of the Surface tablet. The whole point of the reimagined operating system was to launch Microsoft into the world of tablet computing, and without any initial excitement about its tablet, and with the overabundance of Windows 8 insults, Microsoft’s transition away from the dying PC market will be a difficult one.

Microsoft should take a look at McDonald’s strategy. The fast food restaurant has seen enormous success by heavily marketing inexpensive products (e.g. the Dollar Menu) and by promoting low-grade items (e.g. the McRib). Not every diner is looking for a five-star meal. I’m not slamming McDonald’s, of course – I commend the company for its rational business model and expert promotional campaigns like the McRib tour. And, to be thorough, I should point out that the company offers menu options aside from just their Dollar Menu and just the McRib. McDonald’s sells products at various price points including “premium salads” and “premium roast coffee,” and these pricier foods have their place even alongside a Dollar Menu. The company, however, doesn’t lose sight of their target demographic, and neither should Microsoft.

If Microsoft fails to gain traction in the tablet market, the consequences could be dire. Now that Windows 8 seems to be universally hated, and with critics advising PC users to stay with Windows 7, consumers have less incentive to purchase a new PC with the new ecosystem. Microsoft needs to catch consumer interest in its new tablet, and its bait needs to be a low price that users expect.

robbyinvest has no position in any stocks mentioned. The Motley Fool recommends Apple and McDonald's. The Motley Fool owns shares of Apple, McDonald's, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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