The Standard-Setting Pricing Strategy
Price for universal adoption first, monetize dominance later.
- Difficulty
- Moderate
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- —
Bill Gates' pricing philosophy for MITS, Apple, and IBM inverted the usual instinct to charge maximum per-unit royalties on a scarce new technology. Instead, Microsoft accepted low, flat, one-time fees in exchange for keeping ownership of the underlying code and the freedom to license it elsewhere. The mechanism is a positive spiral: making adoption a 'no-brainer' for every hardware maker means more developers and users standardize on your language or operating system, which then makes it even easier for the next hardware maker to choose you instead of a rival, compounding a slight technical or pricing edge into a runaway standard. Only after the standard was locked in did Microsoft shift to volume-based, per-unit licensing, converting years of underpriced positioning into the highest-margin business in computing history.
Origin
Emerged from Bill Gates' negotiations with MITS, Apple, and IBM in the late 1970s and early 1980s as Microsoft fought to make its BASIC and DOS the industry default.
Core principles
- 01Success reinforces success: a slight advantage in a growing market compounds over time.
- 02Remove all friction and objections to adoption rather than maximizing near-term price.
- 03Concede on price, never on ownership of the underlying IP.
How to run it
- 1
Identify the Standard-Setting Moment
Recognize when a new platform or generation of hardware is launching and no default software standard yet exists — this is the only window where the strategy works.
- 2
Price to Remove All Friction
Offer flat, low fees instead of maximizing per-unit royalties so that every potential partner has no reason not to choose you over a rival or building it themselves.
- 3
Prioritize Universal Adoption Over Near-Term Margin
Accept thin or even below-market deals with as many hardware makers as possible to become the de facto standard everyone targets.
- 4
Retain Ownership and Licensing Rights
Never give away the underlying code itself — only license usage — so you can resell the same asset to every other player in the market.
- 5
Shift to Volume-Based Monetization Once Standardized
After adoption is locked in, transition to per-unit or per-machine licensing to capture the value created by the standard you established.
In the wild
When Apple needed a finished BASIC interpreter with floating-point support, Microsoft licensed its already-built BASIC for a flat $31,000 fee covering eight years, rather than charging premium per-unit royalties.
→ Apple adopted Microsoft BASIC as the standard on the Apple II, extending Microsoft's reach into the platform of its future biggest rival and reinforcing BASIC as the industry standard.
Microsoft charged IBM a one-time fixed fee for DOS and language interpreters instead of a per-unit royalty, but insisted on retaining the rights to license the same software to every other computer maker.
→ IBM got a great short-term price; Microsoft got ownership of the emerging PC standard, which it then licensed to hundreds of clone makers on a per-machine basis for a decade of runaway growth.
Once DOS and Windows were the default, Microsoft shifted its OEM contracts to a per-processor fee, collecting revenue on every machine shipped regardless of which OS was installed.
→ Revenue compounded dramatically, though the practice later drew antitrust scrutiny for discouraging competing operating systems.
Common mistakes
Staying Flat-Fee Forever
Some companies never transition from low, standard-setting pricing to capturing value once they've won; Microsoft shifted to per-copy and per-processor licensing only after establishing dominance, converting adoption into revenue.
Giving Away Ownership, Not Just Price
The strategy only works if you concede on price while keeping ownership of the underlying IP — Digital Research reportedly lost the IBM deal partly by not securing a structure like this.
Is it for you?
Not ideal for
Businesses without genuine IP ownership to retain, or markets where switching costs and network effects won't eventually let you convert adoption into pricing power.
From the transcript
“success reinforces success in a growing Market one way of doing something gets a slight advantage over its competitors this is most likely to happen…”
“the Apple deal is $31,000 for8 years of whoa access for Apple for the Apple 2 to Microsoft's basic they're not price gouging here”
From the episode
Microsoft Volume I