Despite plummeting profit margins, Dell Computer Corp. has no intention of backing off from an aggressive PC pricing strategy that it initiated earlier this year.
At its annual analysts meeting in New York last week, Chairman and CEO Michael Dell repeatedly sidestepped questions about how low hes willing to go in the current price war. But he made clear his intentions to turn up the heat on his rivals.
“Our competitors must learn to scale aggressively to compete or exit the market,” Dell told the attendees.
The Round Rock, Texas, companys price slashing has put pressure on its PC competitors to reluctantly follow suit. Last month, the top PC maker, Compaq Computer Corp., of Houston, went against earlier statements and announced plans to reduce prices as one step in combating falling sales and shrinking market share. Still, a price war will be difficult for competitors, particularly smaller PC makers such as NEC Corp., Acer Inc., eMachines Inc. and Quantex Corp. that cant match Dells price efficiencies and deep pockets.
While officials at Dell could not point to specific price reductions its made as part of its new strategy, they said the frequency with which it reviews pricing has increased from one month to multiple times a month.
Pricing alone doesnt sway his decision making, but one IT manager said he has noticed Dells discounting. “Weve seen Dells prices, particularly for mid- to higher-end PCs, move significantly lower, especially compared to companies like Compaq and some other major players,” said Mike Bizub, who oversees about 150 PC desktops at Kim Lighting Inc., in City of Industry, Calif.
“Youve got to realize that theyve got an oxygen tank with an hour in it, and the competitors have a half-hour,” said Andy Neff, an analyst with Bear Stearns & Co., in New York.
Since October, Dell has leveraged its efficient made-to-order business model—as well as slashed its profit margins to historically low levels—to significantly undercut its competitors prices.
While the company has seen a reduction in profit on each product sold, the risky strategy has paid off by luring customers away from competitors.
Underscoring that point, most analysts are projecting that Dell will soon overtake Compaq as the worlds largest PC maker. But Dells decision to give up profit margins has raised concerns.
During the fourth quarter, Dells profit margins fell from 21 percent to 18 percent. In recent years, profit margins in the PC industry have ranged from the low- to mid-20s.
When asked if his company would continue to push prices lower, Dell said, “We will continue to add value for our customers.”