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To: JRI who wrote (58062)	8/13/1998 2:08:00 PM
From: Chuzzlewit	Respond to of 176387

John, it's hard to say. The concept of a loss leader is viable in many businesses. Years ago it was said that MacDonald's lost money on every hamburger sold, but they made it up in sodas and fries. So bundling service together with hardware might be viable, but it seems to me that consumers companies would be looking at total costs, not just hardware. Secondly, if that were the tactic, I would expect that hardware prices would be lower than they are now, and service costs would be higher. Kind of like getting a razor for $.25 from Gillette, and then having to buy razor blades at high prices. But the analogy to MacDonald's quickly falls apart. MacDonalds could use this strategy because of the proximity of the hamburger purchase to the fries purchase. It is ver unlikely that a consumer would walk across the street to buy fries from Wendy's. Similarly, the Gillette strategy falls apart. The problem is one of bundling. If there are third party service providers, then these companies cannot use hardware as loss leaders because there is no assurance of customers buying service from the hardware vendor. Interestingly, these strategies are rampant in the ink jet printer market, where the printers are sold cheaply, and profits are derived from the sale of ink cartridges. I believe that there are currently some lawsuits challenging the legality of some of the tactics used in this this stratagem. Bottom line ---> I don't think the loss leader approach makes much sense. TTFN, CTC

To: JRI who wrote (58062)	8/13/1998 3:02:00 PM
From: rudedog	Respond to of 176387

This is disingenuous - either these folks know little of IBM's history or they are being intentionally misleading. IBM is currently doing exactly this - field sales people, who have the ability to sell both PC and services products, will put together a combined package which has a cost below competing separate offers from other vendors who do not have the service products in-house. There is often no clear distinction in these quotes as to where the money was taken out, so it might be just as easy to say that the services piece took the hit, but IBM's recent financial statements show that they are trying to show good services margins, and have shown very low PC HW margins. The idea that a product group P&L would affect field behavior is just naive. IBM has done this since the mid-60's. To sell PCs at a loss in order to grow another business segment is full of all kinds of problems including legal and anti-trust implications this is also a completely unfounded statement, there is absolutely no anti-trust implied. Businesses are free to do whatever they want in terms of pricing of their product lines. Even the MSFT case does not base any part of their argument on pricing of individual components, but only on illegal tying of the purchase of an undesired product in order to get a desired one. I do not intend by this to draw the conclusion that loss leaders are a sensible business strategy, in fact I don't think they are except in isolated cases. And I also don't think that's what CPQ and IBM are doing. They are combining market strategy for separate product lines to achieve an overall margin that meets their goals while allowing individual products to be priced competitively. This has been the practice at CPQ for a long time - desktop base units were sold at a low margin but disk drives, memory etc. had higher margins, so the ASP stays up and overall margins were OK. This particular strategy has been under attack in the last year or so, primarily by Dell, and so CPQ is shifting the mix to produce an offering Dell can not match by adding services. IBM has been there for a while.