Marketing Test Question?
In a rare slip at Dell, Inc., a company known for its low-cost business model and close attention to operational detail, poor management of the average selling price resulted in a revenue shortfall in the second quarter of 2005. Basically, the company priced its computers too low. Though it shipped an industry-record 9.1 million computers during the quarter, the company failed to meet its quarterly revenue target.
According to Dell’s Web site, the company’s climb to market leadership has been the result of a persistent focus on delivering the best possible customer experience by the direct selling of computer products and services. The company was founded in 1984 by Michael Dell, and its corporate headquarters are in Round Rock, Texas. A worldwide supplier of computer systems, Dell manufactures computers in the United States, Brazil, Ireland, Malaysia, and China. The company holds the number one market position in the United States, the number three position in the Asia Pacific/Japan market, and the number two position in Europe. Worldwide, the company employs about 64,000 people.
Dell’s products include servers, storage, printing and imaging systems, workstations, notebook computers, desktop computers, networking products, and software and peripheral products (e.g., plasma TVs, MP3 players, handhelds). Dell’s service offerings include managed, professional, deployment, support, and training and certification services. Dell’s pricing miscalculations occurred in its computer lines.
In 2005, personal computer makers were facing a mature market where continued growth was difficult. Worldwide PC sales were expected to grow 12.7 percent in 2005, but revenues were expected to grow only 0.5 percent. Such tepid growth prospects were squeezing PC makers from large (Dell) to small (Gateway). Desktop pricing was being forced down to new levels. Additionally, the notebook marketplace, which tends to generate higher margins, was experiencing price declines faster than anticipated. According to one industry expert, the quest for growth was forcing companies to test the limits of PC price elasticity.
During the second quarter, Dell’s average selling price for its consumer computers dropped 13 percent, and the company experienced an average price decrease of 8 percent across all products and markets. Essentially, Dell was advertising its supercheap machines and offering revenue-draining promotions on the low-end machines (e.g., giving away printers with the purchase of even cheap computers). Dell would have met expectations if it had priced the 9.1 million computers it sold in the second quarter just $10 to $15 higher. But the company was operating in a share-building model of growth and was not focusing on selling the more profitable machines. This was considered an unusual marketing strategy for the industry leader—a leader that did not need to slash prices to remain competitive with rival offerings. Thus, Dell’s second quarter unit volume was high, but it undermined revenue growth.
Though Dell executives insisted that these were onetime, easily fixable pricing problems, industry analysts wondered whether Dell was losing its tactical edge. In their view, the company needed to return to selling higher-end, more profitable systems and be less aggressive in the battle for market share. In a marketplace where PC pricing had become more and more competitive, with low-end desktops priced as low as $299 and notebooks dipping below $500, there was concern that the company had not been able to quickly adjust its pricing model to drive revenue and meet expectations.
With competition heating up among notebook competitors (e.g., Hewlett-Packard, Gateway, Averatec), analysts expected that margins in the notebook market would be driven down. Though Dell had met industry expectations for profit margins on its notebooks, the analysts were concerned about its future profit margins in that sector. If they were to decline, Dell would be under additional pressure to get its pricing model back in line, while steering customers toward its more expensive computer products. Although the pricing error was a rare slipup for the company, it brought considerable attention to the operational detail required by a company as large as Dell.
Q:
Because of the perceived quality attached to Dell’s brand name, Dell might have been able to increase prices on all its products by $10 or $15 without suffering a noticeable loss in demand. This means that Dell has which of the following?
Answer
unitary elasticity
high elasticity
inelastic demand