Good salespeople know you make out best when you sell value, not price. So, it's encouraging to see Dell (NASDAQ:DELL) getting in touch with its "inner salesman."
In an effort to lift its consumer and small-business segment, Dell announced on Thursday that it would simplify its pricing structure (the segment represents 15% of total revenues, but only 4% of profit, according to one analyst -- Brent Bracelin of Pacific Crest Securities). In particular, the company aims to reduce the number of promotions per product line by 70%, starting in August with a reduction in the number of mail-in rebates on its "workhorse" line of Inspiron notebooks, as well as on Dell televisions.
While some analysts had predicted that Dell would simply cut prices on notebooks and desktops, this initiative rightly focuses on providing more value, a better ordering experience, and improved customer service. I must admit that in dealing with Dell as a customer several years ago, I was dismayed that a company that is known for its lean manufacturing operations and direct-sales model had such Byzantine ordering and customer service processes.
In some sense, Dell is a victim of its own success. Ruthlessly efficient in driving down manufacturing costs, the Round Rock PC maker has already made its best gains in this area. Competitors such as Hewlett-Packard (NYSE:HPQ) and Lenovo have progressively eaten away at Dell's cost advantage. The fact that Dell's level of customer service appears to have slipped during the same period has compounded the problem.
Even for the cost leader, there is no escaping the relentless economics of a commodity market. Dell's value proposition, which allows customers to build their own computers at low cost, is no longer unique. As PC prices converge, Dell must shift the battle to a different terrain by providing its customers with greater value, thereby avoiding the death dance of price competition. Dell's acquisition of gaming PC manufacturer Alienware in March is consistent with such a strategy. It's a good bet one can extract better margins on a high-end $2,500 machine than on a $699 model. Alienware has established a solid franchise catering to the gamer community, and its attention to design gives it a "cool quotient" its customers are willing to pay extra for -- something that Apple Computer (NASDAQ:AAPL) has capitalized on for years.
Dell's announcement isn't groundbreaking, but I think it is a sign that management is thinking smart. They can't afford not to. With Dell shares off almost 27% year to date (based on Friday's closing price), the executive team has its work cut out for it.
Dell is a Motley Fool Inside Value pick. If you want to see Philip Durell's other stock picks, try a30-dayfree trialto Motley Fool Inside Value.
Fool contributor Alex Dumortier has a beneficial interest in Dell (which is also a Motley Fool Stock Advisor pick), but none in any of the other companies mentioned in this article. He welcomes your (constructive) feedback . The Motley Fool has a strict disclosure policy.
