In the highly price-competitive PC industry, Gateway Incorporated has posted record profits thanks to a number of strategies that spring from its commitment to e-commerce.
While PC prices have been declining, Gateway Incorporated has posted profit increases in 1999 as high as 47% over 1998 earnings. The company has emerged as the number two on-line seller of PCs, behind Dell, as well as a growing supplier of Internet services. Despite price pressures in the industry, Gateway has succeeded in increasing profits and margins through a variety of pricing strategies. First, it has bundled its PCs together with a number of other services. As a result, it has been able to maintain prices on its computers, relative to its competitors, and increase margins. Second, the company has targeted the sophisticated buyer who is more interested in performance than price. And third, it has focused its sales efforts on the less price sensitive business customer.
Unlike its competition, Gateway recognized early on that price pressures for PCs would have a negative impact on its business. Consequently, management decided to lever its PC business by adding products and services that provide higher profits from the same customer base. In addition to PCs, Gateway now offers customers Internet access, software, and financing. These services accounted for more than 10% of the company‘s profit in the second quarter of 1999 and are expected to contribute as much as 30% in the future.
Add-on’s Make the Difference
One analyst has suggested that if Gateway sold only PCs, its margins would have fallen by 14% in the first quarter of 1999, based on industry-wide prices. Instead, their margins from financing and Internet offerings offset this decline by 9 points. Overall, first quarter margins rose to 21.4% from 19.5% a year earlier.
Gateway‘s on-line Internet pricing structure is a good example of how the company caters to both sophisticated and unsophisticated buyers to maximize revenue and profits. While customers who have little knowledge of computers can choose from a variety of pre-designed systems, hard-core technophiles can design their own system choosing from an array of hard drives, modems, and other peripheral equipment– as well as select from a variety of technical support packages. The price for the customized package is generated automatically, taking into account the price for individual components.
Unlike other companies that offer customized packages, Gateway actually allows customers to choose from among different brands of components. Those who know the difference between a Seagate hard drive and other brands can choose the one they prefer.
It is All so Easy…
When the design is defined, the price generator creates a total price based on the components chosen. At that point, the customer is given the opportunity to enter any special credit or instant rebate coupons, as well as discounts that can be earned through the site‘s “Moola Points” system. Customers also have the option to sign up for free Internet access through Gateway‘s ISP (if their purchase is more than $999) or to obtain financing terms. These add-ons not only create more value, they also make price less transparent to the customer.
As a result, customers‘ focus more on the different options that are available to them rather than on the actual price of what they are buying. Each of Gateway‘s strategies has contributed to higher margins and more stable pricing despite the fact that the company relies heavily on the Internet for its sales and distribution–a marketplace where prices can be easily compared with both other Internet sellers as well as more traditional outlets. Gateway‘s experience is a good example of how one company has responded to the price pressure that on-line selling so often creates.