Dell Takes On Pricing in Image Makeover

By John G. Spooner  |  Posted 2006-07-12

Dell Takes On Pricing in Image Makeover

PC makers are going back to the basics on pricing in an attempt to entice buyers.

Dell, which has scheduled a news announcement for July 13, is expected to reveal a revised PC pricing strategy that will present SMBs (small and midsize businesses) and consumers with a more straightforward menu of price options.

The move, which doesnt appear to affect large business accounts, comes as Dell attempts to recover from a series of missteps that curbed its growth during the first quarter of 2006.

But the change also shows that some of the main methods PC makers like Dell have used to entice customers—offers that range from rebates to no-charge component upgrades and waiving shipping fees—have lost some of their allure as the PC market has matured and growth has begun to slow in 2006 following a wave of upgrades in prior years.

To read more about Dells plan to repair its customer service problems with consumers, click here.

Simplifying the buying experience is one of the ways Dell hopes to regain customers confidence, a spokesperson indicated

"Well be announcing several things that together will make the purchase experience simpler for customers," the spokesperson said, but declined to provide additional details on the plan.

Dell isnt the only PC maker thats had another look at its pricing.

"Its now the third quarter. Demand isnt as strong as it was two or three years ago. Everyone is looking at ways to keep shipping those boxes," said David Doaud, an analyst with IDC in Framingham, Mass.

PC unit shipment growth in 2006 is expected by IDC to reach 10.8 percent and 11.7 percent in 2007, with unit shipments reaching about 230 million in 2006 and about 257 million in 2007.

Notebook PC shipments, which have helped drive the PC market over the past few years, continued to grow.

But even their growth rates have slipped from the 40 percent to 50 percent rates seen in years past, Daoud said. "Thats probably making the industry nervous about this years prospects," he said.

Given that competition among manufacturers isnt likely to abate, PC makers are looking at new ways to woo customers—many of which are repeat buyers in the United States—to buy, while fending off competitors.

Dell puts most of its efforts into corporate sales, which are typically about 85 percent of its revenue. Yet it still must defend against Hewlett-Packard and Lenovo, who both have their eyes on Dell customers.

A host of other equally well known, yet smaller brands, including Apple, Gateway, Sony and Toshiba, are also looking for a piece of the pie as well.

Pricing is one of the main levers PC makers have used in the past to motivate both consumers and business buyers to upgrade.

Average PC prices have fallen between 8 percent and 11 percent—depending on whether consumer or corporate or desktops or notebooks are being measured—between the first quarter of 2003 and the first quarter of 2006, Daoud said, citing data from IDCs tracker service.

But now, companies like Gateway—and now Dell, its expected—are changing the way they present their prices to consumers and small business customers.

Dell typically offers a bundle of discounts and special offers with each machine. They almost always include a rebate and a free component upgrade, such as extra memory.

Next Page: Avoiding customer confusion.

Avoiding Customer Confusion

But figuring out the value of the upgrade and its after-rebate price can be confusing to some customers. Others shop both Dells home and small business sites looking for the best deal.

The company appears poised to introduce a simpler scheme that will dispense with the array of offers and instead present a more straightforward, bottom line price for Dell PCs.

The changes arent likely to amount to major price cuts, however. Corporate PC pricing, which is often rolled into large bids, doesnt appear to be on the path toward major changes either.

For its part, Gateway stopped selling low-price PCs direct on June 29 and instead switched to offering direct-sales customers new PC bundles that start at $799.

A $799 desktop, sold via the companys Web site, includes a dual-core Intel processor and comes with Microsofts Office and a flat panel monitor. Its notebooks now start at $999 and also include dual-core Intel chips and widescreen displays.

Customers looking for $400 PCs can still find them at retail stores—where Gateways eMachines brand has proven popular—while those buying direct can still upgrade to faster processors and larger hard drives if they choose.

However, the companys direct business is putting far more emphasis on the bottom line price, Gateway officials said.

The bottom-line emphasis "mirrors, to a lot of extents, what people want from PC pricing today," said Steve Baker, an analyst with The NPD Group in Port Washington, N.Y.

Baker said he believes customers expect to see prices more reflective of what they intend to purchase, versus minimally-configured machines whose emphasis is on low price.

"I think the challenge for Dell to go to something that resembles more of a tiered pricing strategy is that part of the profit for Dell has been in managing the [component] trade-up," Baker said.

"The way you make money in a build to order experience is you trade people up and you manage the process so that the more that they upgrade the more profitable it is."

Technological improvements, including faster processors and bigger hard drives, are less alluring as upgrades than items such as large flat panel displays, Baker said.

At the same time many computer retailers working to phase out rebates, citing customer frustrations with the practice.

To read more about what services Dell has to offer large business customers, click here.

"Certainly the trends in the market are pushing [PC makers and retailers] toward eliminating rebates," he said. Although, "I suspect thats not the only thing that they have to do."

Dell might apply learning from its XPS line of high-end PCs, which it markets using a good-better-best approach. XPS takes a somewhat different approach than Dells mainstream Dimension or Inspiron systems.

But "one of the problems with an upgrade model is that if people dont upgrade, I dont make any money," Baker said.

Done right, revising its model lines to include PC configurations and pricing that are more straightforward would allow Dell to tout a better customer experience—it could advertise bottom-line prices—yet still allow it to build profit into each machine, he said.

Dell could then work to convince customers to upgrade from model-to-model.

That way, "When people trade up they trade up more against platforms than against specific components," Baker said.

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