Dell hits a rough patch

Dell hits a rough patch

Summary: Nick Carr writes that Dell's pioneering direct sales model is showing signs of fatigue due to growing support costs: So there, perhaps, is the flaw in the direct sales model, particularly when it's applied to a commodity product like the PC: You have a cost disadvantage in customer support, which is hidden as long as support represents a fairly small portion of the each product's overall cost.

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TOPICS: Dell
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Nick Carr writes that Dell's pioneering direct sales model is showing signs of fatigue due to growing support costs:

So there, perhaps, is the flaw in the direct sales model, particularly when it's applied to a commodity product like the PC: You have a cost disadvantage in customer support, which is hidden as long as support represents a fairly small portion of the each product's overall cost. But as the price of your product falls, due to savings on the production side, support begins to represent an ever larger percentage of its cost. At some point, you cross the line: The direct model's cost advantage disappears. Dell hasn't reached that line yet, but it seems to be edging a little bit closer to it every day.

Robert Scoble posts anecdotally on the Dell versus Apple experience with customer support. Tom Krazit has good analysis on Dell's recent financial problems--the company issued a warning that revenue and profit will be below expectations for its second fiscal quarter. When I spoke with John Medica, head of Dell's product group a few weeks ago, he said that Dell's goal was to "take the customer experience to another level," and in three years drive reduction in support and repair by 50 percent. That may not be soon enough to reverse the slide and get the Dell formula back on track. Of course, many companies wouldn't turn up their noses at a $14 billion quarter and 21 cents to 23 cents per share in earnings, which is what Dell is expected to announce this week.

Topic: Dell

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  • So?

    So Dell has hit a rough patch! The direct sales model works because there are no middle-men (VARs) and no middle-man profits to share. Dell can still undercut HP for the enterprise business for this reason alone -- and those enterprise clients don't need extnesive customer support so it's a win-win for Dell.

    Consumers are another matter. Sooner or later, economies of scale start to fail and vendors like Dell have to reduce the quality of customer support in order to keep their costs in line.

    Like most others, for Dell that means relegating their consumer customers to front-line staff talkng to them from Bangalore -- 24/7 service with an Indian accent.

    HP and the rest pay a price for that VAR-provided personal customer support but one way or another, the lack of that same level of service eventually works against Dell as well.
    M Wagner