Dell is well-known for having pioneered the direct sales model in the personal computer industry, marketing directly to businesses and consumers, instead of via intermediaries such as retailers. The company also stands out by building its PCs to customer specifications and delivering the computers directly to the customer. These characteristics - coupled with decent customer service - allow Dell to maintain its position as the top direct sales computer manufacturer in the world, with sales this year of $49,205 million and a growth in sales of 18.7% p.a .(Hoovers).
Nevertheless, although Dell is successful at creating customer value with other marketing mix activities, it also has to capture this value through the prices earned (Principles of Marketing; P. Kotler & G. Armstrong, P. 343). The company thus employs a number of pricing strategies in order to maintain its leadership in the market and maximise its revenue.
Firstly, it employed market-penetration pricing when launching its PCs (Principles of Marketing, p.371). The company charged a low initial price to swiftly penetrate the market and gain a large market share from its main competitors. This approach was successful because the PC market is price sensitive. Also, Dell's low production costs (e.g. achieved through low inventory levels and close relationships with suppliers) and its innovative direct sales model helped keep competitors at bay and sustain the low prices.
Secondly, Dell practices customer segmented pricing, selling the same product at two or more prices, where the price difference is not based on cost differences (Principles of Marketing, p.376). "The Dell Latitude [...] laptop was listed at $2,307 on the company's Web page catering to small businesses. On the Web page for [...] health-care companies, the same machine was listed at $2,228, or 3% less. For [...] governments, it was priced at $2,072.04, or 10% less than the price for small businesses." ("Dell Fine-Tunes It's Pricing to Gain an Edge in Slow Market"; Gary McWilliams. The Wall Street Journal, June 8, 2001). Indeed, www.dell.com has four separate sections catering to different customer segments: individual consumers; small businesses; medium and large businesses; and government, educational and healthcare organisations. All sections presumably offer slightly different prices for the same products. In addition, Dell offers discounts to the employees of corporate customers, further expanding its client base (through my work I can get a 12% discount off most Dell PCs).
Thirdly, Dell excels at optional-product pricing. Consumers are presented with basic PCs on the company's website and are invited to customise their computer by adding on accessories and extra services such as security software, extra memory, or larger monitors before making a purchase.
Fourthly, the company engages in product bundle pricing. It has forged partnerships with different companies to offer consumers combined products and services for less than the sum of their individual prices (Principles of Marketing, p. 375). Examples include Napster (one month free trial with the purchase of a Dell DJ MP3 player), AOL (six months free with the purchase of a PC) and QuickBooks financial software (offered at a reduced price if purchased together with a PC).
Fifth, Dell uses different promotional pricing tactics, such as discounts or rebates to expand its market share and engage competitors in price wars that it is almost certain to win (Principles of Marketing, p. 378). An article in BusinessWeek describes how Dell announced price cuts of around 20% in the past two years, timed with the release of disappointing earnings statements by its rival Hewlett-Packard.
Sixth, Dell "has begun demanding flexible pricing in its contracts with suppliers, many of which also continually update Dell on their own costs" ("Dell Fine-Tunes It's Pricing to Gain an Edge in Slow Market", The Wall Street Journal). This, combined with the phone and web-based direct sales model, allows the company to react quickly to reductions in component prices and pass on the savings to consumers. Competitors that do not have close relationships with their supply chain partners and rely on sales via a bricks and mortar marketing channel will find it impossible to react quickly to suppliers' price changes.
To conclude, Dell's business model and market leadership give it a clear advantage over its competitors for the foreseeable future. Indeed, the current trend of lowering component prices provides a rosy outlook for the company. Dell's built-to-order products are ideal for competing in this environment; "Because it carries less inventory than HP, it can take advantage of the lower prices as they occur"(BusinessWeek).
