The price factor

This morning I read two fine articles here on ZDNet that looked at price. Jason Perlow touched on price in his "Der Frankenputer" piece, and Andrew Nusca took the subject of price head on in his piece "Culture of cheap: How discount computers cost the consumer". But what effect does price have on a consumer?

First point worth making is that it wasn't consumers that drove down the price of computers, it was OEMs, specifically big names such as Dell and Gateway. These companies aggressively drove down the price of PCs, annihilating countless smaller OEMs in the process. But the problem with using a price war to gain ground is that it's a hard gambit to escape from unless you are the last man standing. Effectively companies become hooked on pursuing market share at the expense of profit margin, the idea being that profits will follow on from a healthy market share.

What these big name OEMs did was effectively devalue the price of a PC to the point that it became hard for anyone to make a profit out of it. Sure, at the high end of the spectrum people are willing to pay crazy money for PCs, but at the lower-end things are very different, and profit margins are razor thin. If you think you are getting a good deal from an OEM, chances are you probably aren't. Something always gives. Support. Quality. Being chiseled for "extras" such as warranties. Longevity. There's no such thing as a free lunch. Even if you do end up getting a splendid deal, someone ends up getting the arrow in the back, whether it be the local support technician in favor of outsourced tech support, or the person paying over the odds for the higher-end PC system. Someone, somewhere is paying for that good deal.

Note: This is why Apple rarely competes on price. Once price becomes the standard, it's a quick death-spiral to the bottom!

Another thing that I've found to be true is that most consumers want the cheapest PC possible, until they get it home, at which point they expect it to transform into a supercomputer. Part of the problem here is that most people really don't know what they want from a PC, and they buy from people who only know fractionally more and who are motivated by sales commission. In the land of the blind ... I'm neither kidding nor exaggerating when I say that I've known people (sensible, intelligent people) highlight the quality of a system they bought based on how smoothly the CD tray opens and closes, the quality of the cabling, the stylish "air holes" and the "amazing" free mouse mat they received with their system. Even many people spending $2,000+ on a system don't really know what they are looking for or want. Many seem to feel that price is directly linked to performance, or that there's a direct correlation between price and quality, or that paying more means they get "first class" treatment when things go wrong.

Note: Again, here's something that OEMs can learn from Apple. Apple charges a high ticket price, but it also has worked to reduce the number of problems that customers experience in their first year of ownership. It's a company that also offers a higher quality than the average when it comes to support. People are far more likely to rebuy a $1,500+ system from the same vendor if they haven't felt burned the first time around. It doesn't matter if Apple profit margins are high as long as customers are happy to pay the price.

There's an ignorance when it comes to home build systems too. Whenever I post the "ingredients" for a systems costing $X, I always get comments from people who claim to have found the exact same thing for sale by an OEM for less money. It might have the same CPU, and the same amount of RAM or storage, but I guarantee you it isn't the same. I don't build my own systems because I'm cheap, I do it because I'm after something better, something that will outlast, outperform, and outoverclock an OEM system. I learned to look beyond price a long time ago.

When it comes to products such as netbooks, I don't think we buy these specifically because they are cheap (a point which Nusca extrapolates from an argument made by correspondent Ellen Ruppel Shell), but because we think they will satisfy a need. Sure, cheap make the purchase "safer" but the real reason for the explosive sale of netbooks is that many people are buying them because they aren't really sure what they can do (and as such have an exaggerated sense of their abilities). The novelty will soon wear off. I remember when notebooks were a novelty, and small desktop systems, and flat-panel screens, and CDs, and DVDs ...

Does rock bottom pricing stifle innovation? Well, the way I see the industry right now, prices are about as low as they can go, for the time being at least. This means that there's going to have to be a phase of innovation because price won't be there as an incentive. My feeling is that we're entering a new phase of innovation.

Thoughts?