Thursday, August 30, 2001
PC Pricing Could Baffle Buyers
With numerous choices, consumers could spend more than they’d planned
By Patrick Seitz
Investor's Business Daily
For what’s supposed to be a commodity product, personal computers sport a wide range of prices these days.
PC ads in newspapers list product specifications for all to see. So the choice for consumers should be easy. Pick the computer with the best price. Right?
Hardly. For most consumers, buying a new computer is like buying a car. It’s a complex process with many trade-offs, both technological and financial.
And PC makers and retailers aren’t simplifying things. The confusing assortment of hardware configurations, bundles, rebates and upgrade options often makes consumers spend more than they’d planned.
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Image: Falling Prices
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“There’s a baffling array of prices and configurations,” said Roger Kay, an analyst with International Data Corp.
Consumers are faced with price swings of several hundred dollars for comparable midrange PCs, depending on the vendor and specific hardware setup, he says.
Even if you know what you want, the choices can be confusing. Say you want a PC with a 1-gigahertz processor, 128 megabytes of DRAM memory, a 40-gigabyte hard drive, rewritable compact disc drive, 17-inch monitor, speakers and a printer.
Package deals for those specs advertised last week at Best Buy, Circuit City, Office Depot, Staples and Dell Computer Corp.’s (DELL) online store varied by as much as $200. Packages also varied by offering such extra features as digital video disc drives, graphics cards and free Internet service.
Rebates A Hit With Retailers
The cheapest was Dell at $950. The most expensive was a Hewlett-Packard Co. (HWP) computer at Circuit City (CC) for $1,150 after a mail-in rebate.
One Best Buy deal required shoppers to mail in four rebates totaling $210. Retailers love mail-in rebates because so many shoppers forget to redeem them.
PC prices can vary by $500 or more if shoppers consider a slightly different chip speed, hard drive size and monitor size.
For the most common PC applications, such as Web surfing and word processing, the difference of several hundred megahertz on either side of 1 GHz in processing speed and a hard drive of 20 gigabytes or more isn’t going to be that noticeable.
“One of the challenges for the industry is that for many users, the amount of technology that’s being delivered exceeds their needs,” said Charles Smulders, an analyst with market researcher Gartner Inc. “In the short term, there are few applications that really require the performance that’s being delivered.”
Some technologies on the horizon, or poised for wider adoption, could change that. They include voice recognition, movie-editing applications and broadband Internet service. Even Microsoft Corp.’s upcoming operating system, Windows XP, demands more capable hardware. It requires a minimum 128 MB of memory.
Business customers are even less likely to need higher-end PCs. Business users typically account for about 60% of PC sales.
“The professional market is the most worrisome segment for the PC industry,” Smulders said. “People who are just using spreadsheets and word processing don’t need the extra performance.”
PC companies are on a treadmill of delivering more and more technology to maintain their average system prices, he says. But average system prices have been falling for at least the last two years. PC sales also are on the decline as consumers and businesses wait longer to replace them.
For all the talk about PCs becoming commodities, only the components really are. “It’s not like buying September wheat,” Kay said.
PC makers are trying to avoid the commodity trap, where price is the only distinguishing factor among products. Instead, they’re aiming to sell PC systems designed for certain users, Smulders says.
For instance, he says, they can target consumers interested in digital photography by selling systems optimized with photo editing software and hardware.
Apple Computer Inc. (AAPL) and Sony Corp. (SNE) have done a good job selling computers for multimedia uses, including music, photos and home movies.
Bundles are very important to PC vendors because they take the product out of the commodity realm, says Compaq Computer Corp. (CPQ) spokesman Roger Frizzell. Bundles can include special PC hardware and software configurations as well as printers and other peripherals.
Build-your-own-PC services should be the great equalizer in comparing prices. But even the king in that category, Dell, pushes upgrades for its low-end models.
Online Not Always Cheaper
When buying a PC on Dell’s Web site, customers have to push their virtual shopping cart past the “candy rack” at checkout, where they’re coaxed to upgrade or add features, Kay says.
Another complicating factor is that buying PCs online isn’t always cheaper than getting them in retail stores. That’s because computer makers and retailers sometimes need to get rid of older inventory and will use price incentives to do that.
Consumers are likely to see nice price cuts soon on PCs with Pentium III chips, for example. Chipmaker Intel Corp. (INTC) is moving from Pentium III chips to speedier Pentium 4 processors. Intel plans to cut prices on its older chips as much as 50%. On Monday, it released its fastest processor to date — the 2 GHz Pentium 4 chip.
“In the next couple of months, the remaining P3 systems will come on the market at real fire-sale prices,” Kay said.
The plethora of PC price points will continue with the Pentium 4. It will come in a range of speeds and will be matched with different hardware configurations.
The PC industry has purposefully created complexity in its pricing and configurations, Smulders says.
In many cases, retailers use low-priced computers to get consumers into the store, where they can then push upgrades and peripherals, analysts say.
“You came in for the promotional sale and got the $800 machine, but by the time you left, you ended up spending $1,200,” Kay said. That’s after you get the printer, a larger monitor and other hardware and software upgrades and extras.
A lot of the extras are high-margin items that make the difference between a profitable and unprofitable sale for the retailer, Kay says. For instance, the cable to connect a printer to your PC can cost $25 at retail, but only costs 50 cents to make, he says.
Other high-margin extras include extended warranties and colored plastic PC faceplates. |
