The Price Is Very Right

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Ask someone to name a few of the top-selling computer brands and they'll probably come up with companies like Dell, Compaq, and Hewlett-Packard. Here's another to add to the list: eMachines. We don't blame you if you've never heard of it. The Irvine, California-based company didn't even exist eight months ago. So what catapulted it into the big league? Dirt cheap prices. While the going retail price for a computer hovered around $1,000 at the end of last year, the average price tag on an eMachine was just over $400. That rock-bottom price helped the company sell more than 180,000 units in its first two months of business. And the momentum continues: According to ZD Market Intelligence, eMachines now owns roughly 6 percent of the desktop retail market, on par with Apple and its much ballyhooed iMac. "Everything the market research predicted came true," says CEO Stephen Dukker.

In fact, market research was the very reason eMachines Inc. was born last September. Two Korean technology firms, Korea Data Systems and TriGem, agreed to launch the joint venture after Dukker convinced them that there was a huge untapped market for inexpensive, reliable PCs. He knew what he was talking about. Back when Dukker was senior vice president of merchandising at Computer City, a national retail chain, he and his market research team conducted a little experiment. At that time, more than two years ago, the cheapest price for a PC in a store was about $799. That price level, Dukker recalls, was a disaster. "The customer willing to pay $1,100 suddenly became a customer who only paid $800," he says. "The price didn't expand the market-it cannibalized it." And return rates were high, running about 12 percent. What was the problem? Focus group participants, many of whom reported household incomes between $30,000 and $50,000, said they didn't want to miss the high-tech bandwagon, but felt they had spent too much on the computer. They were looking for a reason-a faulty keyboard, perhaps-to return it.

What would happen, Dukker wondered, if the price dropped lower? Could the retailer attract new buyers? And how would those customers behave at different price levels? To find out, researchers cut the price for a store-brand personal computer to $499. Computers flew off the shelves, and even better, return rates dropped below 5 percent. Buyers of these ultra-cheap machines tended to be happy with what they got in the box. They weren't expecting cutting-edge technology at such a low price and the computers satisfied their basic needs. Indeed, Dukker says, these buyers saw the PC more like an appliance rather than a high-tech device. Plus, the "I can't afford this" factor practically disappeared.

That attitude describes many first-time PC buyers today. According to Forrester Research, new buyers will purchase about 40 percent of all personal computers this year, and they'll differ significantly from those who plugged in their first machine a few years ago. Early adopters were often college-educated, high-income consumers who already used computers at work. Today, according to Forrester, roughly 37 percent of new buyers have attended college and 68 percent earn less than $35,000. Seventy-two percent do not use a computer at work. And when asked why they intend to buy a machine, 69 percent of potential buyers simply said that they want to learn how to use it. "These consumers are real neophytes," says Shelley Morrisette, group director of quantitative research at Forrester. "They keep hearing about the Internet and feel like they're being left out of something." Price matters to these consumers, too. About 47 percent of shoppers say they won't spend more than $1,000 for their new computer.

Internal research shows that eMachines is reaching these cost-conscious shoppers. Of those who bought an eMachine during the company's first three months, 44 percent reported that they were first-time buyers. Roughly 53 percent of all purchasers said their annual household income was below $50,000; a full 30 percent said it was below $35,000. Sales pitches weren't really necessary with these consumers-47 percent said price was the driving factor that influenced their purchase.

Sales pitches were necessary, however, to get eMachines onto the shelves of major retailers. Dukker understood their concerns. "They feared that a $500 computer would take away from the $800 market," he says. "We showed them the research to prove we could bring in new customers," not cut in on the market for higher-priced models. Today, retail accounts for 95 percent of eMachines' sales, and seven of the ten outlets with the highest sales of personal computers carry the brand. That list includes powerhouses like Office Depot, Staples, Circuit City, and Best Buy. In an ironic twist, Dukker hopes to add top seller CompUSA-which now owns his former employer, Computer City-to his roster this year.

So far, so good. Best Buy, the number-two seller, has seen an increase in store traffic with the arrival of eMachines, says spokesperson Joy Harris. The brand's popularity has also landed it on the front page of the chain's weekly newspaper circular. That's good news for eMachines: the company does not have an advertising budget, so it relies heavily on retail promotions and word-of-mouth recommendations.

The question still remains whether eMachines can turn a profit. "It's a balance sheet challenge to be in this end of the market where there's such low margins," says Bruce Stephen, an analyst with International Data Corp. He and other analysts agree that keeping volume high is key. Dukker contends that the company will show a profit in the first quarter of 1999 and is on track to do $1 billion in sales this year.

That may be setting the bar rather high, considering potential competition from industry giants like IBM, which promoted a $599 computer just last Christmas. But IDC's Stephen doesn't expect an onslaught of vendors to go the sub-$500 route this year; leaders like Compaq and Dell have costly sales and distribution channels to support, so they don't want their prices to plummet too far, too fast. Still, they're probably watching eMachines' moves closely.

Brand extensions are definitely on the agenda. Dukker says he's been contacted by major Internet service providers interested in buying eMachines and giving them away as freebies to lure new customers. In return, subscribers would agree to a multiple-year contract with the provider. A similar model is already out there-witness the public frenzy over the announcement in February that a company called Free-PC would provide computers and Internet service to people willing to have targeted ads pop up continuously on their screens.

Dukker, and analysts too, forecast several more promotions to debut before year's end. Will eMachines be a player? "We think so," Dukker says coyly.

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