Are Market Share Gains Worth Profit Margin Losses?

An article in The Wall Street Journal this week reported how Hewlett-Packard has set out to become the market leader in PCs. A key strategy in H-P's quest is using low price to attract buyers. Case in point is offering an entry level laptop for just under $300 in the recent back-to-school selling period, with plans to do more of the same this Christmas. H-P is moving toward its goal of being the market leader, with its 2nd quarter market share hovering around 20%. Dell, H-P's chief competitor, had just under 14% share for the same period.

Market share is nice to have, but it is crucial not to lose sight of the profit picture. H-P's operating margin was 4.6% in July, down almost 1% from the same period last year. The prevailing mindset in the pricing game has always been to set a lower selling price, and additional sales volume will make up for the lost revenue. Nice concept, too bad it rarely happens. In this case, H-P's expectation could be that increased sales of PCs will lead to sales of complementary, higher margin products, such as printers, ink cartridges, and other peripheral devices. Another interpretation of H-P's pricing strategy is a signal that it sees PCs becoming more of a commodity, making it difficult to maintain high profit margins.

For its part, Dell appears to staying out of a price war with H-P. It is focused on its own profit situation, and giving up profits to sell a few extra PCs does not seem to be an option for Dell at this time. Market leadership and profitability are two distinct metrics. Dell has chosen to find some other approach rather than price to compete in the PC market. At some point, Dell may feel compelled to fight H-P's prices, but for now it is pursuing more profitable options to compete.

The Wall Street Journal - "H-P Wields Its Clout to Undercut PC Rivals"

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