Dell – Upping Margins in a Commodity Market

It seems as though Dell always surprises me. Many people consider the PC market at near commodity status, yet Dell has decided to raise prices to get better margins.

Dell has outfoxed HP before, but this time it's using different tactics. After three years of slashing prices to grab PC market share, Dell is backing away from the industry's bloodiest price wars in a bid to goose its profits. Since July, the company has raised prices as much as 13% on some desktops, including its low-end ones, and held pricing firm on most others, according to researcher Current Analysis Inc.

If Dell stays the course, could this mark a significant shift in PC pricing after years of downward pressure? Most experts say that's unlikely since Dell's rivals are locked in a brutal battle at the bottom of the market and in no position to raise prices. Budget-price PCs, says Chuck May, vice-president of desktops for Gateway, "are critical for driving sales."

But whatever its rivals do, Dell's shift is already helping the bottom line. While raising prices has slowed sales growth — second-quarter unit shipments were up just 19%, the slowest rate in more than a year — revenues rose 20%, to $11.7 billion, while net income soared to $799 million.

Dell is an amazing example of a company that continually changes strategy, yet is successful each time. That means the people at Dell are masters at execution, which I think is the difficult part of any business. The interesting thing about this move is that many companies focus more on market share than anything else, yet Kevin Rollins knew that margins are just as important. That is the tough part of running a business. So many people focus on one number, when there are really many factors that must be considered together. Sometimes the hardest part is to decide where to position yourself in the market, and then focus on that niche. If you are trying to be the high-end provider, you won't have the highest market share. If you are trying to be the low price leader, you won't have the margins that others have.

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