DELL DIRECT
When 19-year-old Michael Dell began selling personal computers out of his college dorm room in 1984, few would
have bet on his chances for success. In those days, most computer makers sold their PCs through an extensive network
of all-powerful distributors and resellers. Even as the fledgling Dell Computer Corporation began to grow, competitors
and industry insiders scoffed at the concept of mail-order computer marketing. PC buyers, they contended, needed the
kind of advice and hand-holding that only full-service channels could provide.
Yet young Michael Dell has proved the skeptics wrong—way wrong. In little more than a decade and a half, he has
turned his dorm-room mail-order business into a burgeoning, $22 billion computer empire. Dell Computer is now the
world's largest direct marketer of computer systems, the number-two PC maker, and the world's fastest-growing
computer manufacturer. Over the past three years, Dell's sales have increased at an average of 53 percent per year, twice
as fast as any competitor and five times the industry average. Profits have skyrocketed 89 percent per year. Since 1990,
Dell's stock has risen an incredible 29,600 percent! Direct buyers now account for nearly a third of all PC sales, and
Dell's once-skeptical competitors are now scrambling to build their own direct-marketing systems.
What's the secret to Dell's stunning success? Anyone at Dell
can tell you without hesitation: It's the company's radically
different business model—the direct model. "We have a
tremendously clear business model," says Michael Dell, the
34-year-old founder. "There's no confusion about what the
value proposition is, what the company offers, and why it's
great for customers. That's a very simple thing, but it has
tremendous power and appeal." It also garners tremendous
success for the company.
Dell's direct-marketing approach delivers greater customer
value through an unbeatable combination of product
customization, low prices, fast delivery, and award-winning
customer service. A customer can talk by phone with a Dell
representative on Monday morning; order a fully
customized, state-of-the-art PC to suit his or her special
needs; and have the machine delivered to his or her doorstep
by Wednesday—all at a price that's 10 to 15 percent below
competitors' prices for a comparably performing PC. Dell
backs its products with high-quality service and support. As
a result, Dell consistently ranks among the industry leaders
in product reliability and service, and its customers are routinely among the industry's most satisfied.
Dell customers get exactly the machines they need. Michael Dell's initial idea was to serve individual buyers by letting
them customize machines with the special features they wanted at low prices. However, this one-to-one approach also
appeals strongly to corporate buyers, because Dell can so easily preconfigure each computer to precise requirements.
Dell routinely preloads machines with a company's own software and even undertakes tedious tasks such as pasting
inventory tags onto each machine so that computers can be delivered directly to a given employee's desk. As a result,
nearly two-thirds of Dell's sales now come from large corporate, government, and educational buyers.
Direct selling results in more efficient selling and lower costs, which translate into lower prices for customers. Because
Dell builds machines to order, it carries barely any inventory. Dealing one-to-one with customers helps the company
react immediately to shifts in demand, so Dell doesn't get stuck with PCs no one wants. Finally, by selling directly, Dell
has no dealers to pay. As a result, on average, Dell's costs are 12 percent lower than those of Compaq, its leading PC
competitor.
Dell knows that time is money, and the company is obsessed with "speed." For example, Dell has long been a model of
just-in-time manufacturing and efficient supply chain management. It has also mastered the intricacies of today's
lightning-fast electronic commerce. The combination makes Dell a lean and very fast operator. According to one
account, "Dell calls it 'velocity'—squeezing time out of every step in the process—from the moment an order is taken to
collecting the cash. [By selling direct, manufacturing to order, and] tapping credit cards and electronic payment, Dell
converts the average sale to cash in less than 24 hours. By contrast, Compaq Computer Corp., which sells primarily
through dealers, takes 35 days, and even mail-order rival Gateway 2000 takes 16.4 days." Such blazing speed results in
more satisfied customers and still lower costs. For example, customers are often delighted to find their new computers
arriving within as few as 36 hours of placing an order. And because Dell doesn't order parts until an order is booked, it
can take advantage of ever-falling component costs. On average, its parts are 60 days newer than those in competing
machines, and, hence, 60 days farther down the price curve. This gives Dell a 6 percent profit advantage from parts
costs alone.
Flush with success, Dell has taken its direct-marketing formula a step further. It's selling PCs on the Internet—lots of
PCs. Now, by simply clicking the "Buy a Dell" icon at Dell's Web site, customers can design and price customized
computer systems electronically. Then, with a click on the "purchase" button, they can submit an order, choosing from
online payment options that include a credit card, company purchase order, or corporate lease. Dell dashes out a digital
confirmation to customers within five minutes of receiving the order. After receiving confirmation, customers can check
the status of the order online at any time.
The Internet is a perfect extension of Dell's direct-marketing model. Customers who are already comfortable buying
direct from Dell now have an even more powerful way to do so. "The Internet," says Michael Dell, "is the ultimate
direct model. . . . [Customers] like the immediacy, convenience, savings, and personal touches that the [Internet]
experience provides. Not only are some sales done completely online, but people who call on the phone after having
visited Dell.com are twice as likely to buy."
The direct-marketing pioneer now sells more than $30 million worth of computers daily from its Web site, accounting
for over 40 percent of revenues. In just a single quarter last year, Dell.com received some 25 million visits at more than
50 country-specific sites. Buyers range from individuals purchasing home computers to large business users buying
high-end $30,000 servers. Michael Dell sees online marketing as the next great conquest in the company's directmarketing crusade. "The Internet is like a booster rocket on our sales and growth," he proclaims. "Our vision is to have
all customers conduct all transactions on the Internet, globally."
As you might imagine, competitors are no longer scoffing at Michael Dell's vision of the future. It's hard to argue with
success, and Michael Dell has been very successful. By following his hunches, at the tender age of 34 he has built one
of the world's hottest computer companies. In the process, he's amassed a personal fortune exceeding $16.5 billion.
Many of the marketing tools that we've examined in previous chapters were developed in the context of mass
marketing: targeting broad markets with standardized messages and offers distributed through intermediaries. Today,
however, with the trend toward more narrowly targeted or one-to-one marketing, more and more companies are
adopting direct marketing, either as a primary marketing approach or as a supplement to other approaches. Increasingly,
companies are turning to direct marketing in an effort to reach carefully targeted customers more efficiently and to build
stronger, more personal, one-to-one relationships with them.
On its Web page, Dell explains its direct model this way:
Dell's award-winning customer service, industry-leading growth, and financial performance continue to differentiate
the company from competitors. At the heart of that performance is Dell's unique direct-to-customer business model.
"Direct" refers to the company's relationships with its customers, from home-PC users to the world's largest
corporations. There are no retailers or other resellers adding unnecessary time and cost, or diminishing Dell's
understanding of customer expectations. Why are computer-systems customers and investors increasingly turning to
Dell and its unique direct model? There are several reasons: (1) Price for Performance: By eliminating resellers,
retailers, and other costly intermediary steps, together with the industry's most efficient procurement, manufacturing,
and distribution process, Dell offers its customers more powerful, more richly configured systems for the money than
competitors. (2) Customization: Every Dell system is built to order—customers get exactly, and only, what they want.
(3) Service and Support: Dell uses knowledge gained from direct contact before and after the sale to provide awardwinning, tailored customer service. (4) Latest Technology: Dell's efficient model means the latest relevant technology is
introduced in its product lines much more quickly than through slow-moving indirect distribution channels. Inventory is
turned over every 10 or fewer days, on average, keeping related costs low. (5) Superior Shareholder Value: During the
past fiscal year, the value of Dell common stock more than doubled. In [the previous two years], Dell was the topperforming stock among the Standard & Poor's 500 and Nasdaq 100, and represented the top-performing U.S. stock on
the Dow Jones World Stock Index.
Thus, Dell has built its entire approach to the marketplace around direct marketing. This direct model has proven highly
successful, not just for Dell, but for the fast-growing number of other companies that employ it.
What is direct marketing?
What are its benefits to companies and their customers?
How do customer databases support direct marketing?
What channels do direct marketers use to reach individual prospects and customers?
What marketing opportunities do online and Internet channels provide?
How can companies use integrated direct marketing for competitive advantage?
What public and ethical issues are raised by direct and online marketing?