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Anatomy of a price increase.

Back in 1986, the first version of Central Point Software's PC Tools showed up on retail shelves with a modest $39 price tag. Today, the list price of PC Tools Deluxe has crept up to $149--a 282% increase--and sales are at record-breaking levels. In retrospect, says Central Point president Corey Smith, the three-step increase ultimately contributed to the company's rapid growth and strong presence in the DOS utilities market. But each increase also represented a leap into the unknown. 'Every time we pushed the price up, it was an agonizing decision," he says.

The original $39 PC Tools price, Smith says, was adopted because it was "in line, with what the company had been charging for its lead product, a copy-protection utility called Copy II. Rather than compete head-to-head with established DOS utility competitors, he adds, Central Point focused on "auxiliary" sales to the company's installed base of 500,000 Copy II users.

Fairly quickly, it became clear that $39 "wasn't a credible price," Smith says. "People were actually repelled. They kept telling us that anything this good should sell at a higher price point."

In early 1987 Central Point released a more powerful version, PC Tools Deluxe, and bumped up the price up to $79. The result was broader acceptance, especially in the corporate market, and significant growth in market share against Peter Norton Computing, a well-entrenched competitor. But even at $79, Smith says the company's net from distributors (who received discounts of 61%-63%) was less than $30 a copy. "We knew we couldn't build a big company on this kind of revenue."

Smith and company founder mike Brown wrestled with the question of a second price increase. "We had entered the business from a predatory pricing standpoint, and we were delivering great value and great customer service. But we knew that if we raised the price, weld change the value equation," he says.

Moreover, short-term profitability wasn't the only critical factor. The greatest value to us wasn't revenue but market share. We knew we were going to be in this market for the long haul."

Rather than commit to a higher price, Smith says Central Point dodged the issue in late 1989 by releasing a major upgrade, PC Tools Deluxe 5, at a $79 'introductory price.- The new version came with several major enhancements and a hefty 700-page manual, so it represented even greater value for its price, Smith points out. Customers apparently agreed: In the first quarter of 1989, Central Point shipped more than 250,000 copies of the new version.

That success convinced Smith and Brown that a second price increase wouldn't hurt. With Version 5.5, which reached the market in July 1989, Central Point boosted its list price to $129. At the same time, the company trimmed its reseller discount to around 54%. -That meant the street price would be around $80--still low enough to be a discretionary purchase, and well below Norton," Smith says. Central Point also paid close attention to its upgrade pricing structure. In the past, the company had charged $15 plus a $2.50 handling change for upgrades. Now, the upgrade price was set at an all-inclusive $25.

"We kept looking for declining sales or disgruntled customers," Smith says. "It never happened. And we got absolutely zero letters of complaint."

So, early this year, Central Point put in place its third increase. Version 6 of PC Tools Deluxe now carries a $149 price tag, and reseller discounts have dropped another few points, to 51%-53%. The net result, says Smith, is that Central Point clears over $70 on each copy it sells into the channel.

Smith points out that it's hard to pin down the exact impact of the price increase on Central Point's revenues, because other variables--including expanded overseas sales--have also helped boost sales. But he says unit volume in the U.S. is up by more than 40% this year, and over 50% of registered users have already bought upgrades. "You look at something like this and want to kick yourself," he says. "Why didn't we do it before?"

Corey Smith, president, Central Point Software, 15220 N.W. Greenbrier Pkwy., Beaverton, Ore. 97006; 503/690-5160.
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Title Annotation:Central Point Software's PC Tools Deluxe
Date:Aug 20, 1990
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