What do you do for an encore after you've reached the point of selling $10 million worth of computers online-per day? Michael Dell is one of the few able to answer that question. His response? Half of Dell sales will come via dell.com in three years or less.
Now sit back and let him show you how, When the top executives at Dell Computer Corp. gave presentations to journalists and financial analysts at an October meeting, every slide had two elements in common: the name of the company and the address of its web site. The former was routine; the latter part of a strategic campaign.
If such a strategy seems decidedly rudimentary, circa Q4 1998, it should come as no surprise. Dell has never been known as an innovator. If ever there was a group of practical marketing scientists in the PC industry, this is it. Likewise, Dell has never been much of a technical innovator. But in a business where customer satisfaction has typically been an afterthought, the company has taken an almost unique path: building a machine the customer actually wants, and then selling it in the most direct possible way. Only in the tech industry would pure common sense sound visionary.
Point A to Point B: Dell finds the most efficient route to its customers. And now that Dell has decided that the Internet is the best route of all, it's relentlessly embedding cyber-commerce into everything it does. Its foray into Internet sales began as an experiment just 30 months ago, when "Internet commerce" was mostly an interesting and unproven phrase. Customers flocked to dell.com. When Dell reported, just a few months later, that it was selling a million dollars of hardware online per day, the technology world was agog. That milestone, of course, was only the beginning.
In its most recent earnings announcement, Dell declared that it was pulling in more than $10 million per day on the Net. Now, in an audacious prediction for a company whose growth has been spectacular for years-including during this past quarter, in which it showed 65 percent year-over-year growth on $4.82 billion in sales at a time when the industry grew at 15 percent-Dell says it'll chalk up more than half its revenues online within three years. Actually, says a confident Michael Dell, who founded the Austin company in 1984 and serves as chairman and CEO, "I think it could happen even sooner."
He's far, far from his early business days of selling PCs out of a University of Texas dorm room. In late 1998 his company is the image of the modern technology enterprise, and he's the image of the modern technology executive. In a roomful of Wall Street stock analysts, he's as well-dressed as anyone-and despite his relative youth, quite obviously in control of the scene.
The man's self-confidence, though, seems tinged with bemusement-as if he can't really believe the way his company's stock has taken off. That may help account for his success: If it's not quite believable, he has to work harder to prove it true. Every time the Dell stock rocket has threatened to flame out, Dell has found new fuel. Tomorrow's fuel, Michael Dell intones, is the Net itself.
Of course, Dell Computer wouldn't be the first major company to post more than half its revenues online. Networking giant Cisco, which sells mostly to distributors, passed that milestone some time ago, and its Net sales are much larger than Dell's. And Net retailers like Amazon.com passed the mark the day they opened shop. But Dell, operating in a commodity business, has taken such lessons-and its own experiences-to heart. It has moved considerably further than any other PC manufacturer in making the Net an essential part of its corporate ecosystem, for communications as well as commerce. Starting at the top, the company has bought the notion that the Net isn't just a bolted-on sales tool; it's increasingly intertwined with everything the company does.
Indeed, Dell has embraced the Internet because it fundamentally makes sense. Not only does the Net help the company maintain the lowest cost structure in its competitive class-it's become a strong rival to top, channel-oriented manufacturers such as IBM, Compaq and HP, and leads in direct sales-but doing business online is an utterly natural extension of the direct-sales system that Dell has so successfully mastered.
Kurt King, who follows Dell for NationsBanc Montgomery Securities, says the company is on track to its goal of posting half of revenues on the Net-and he approves. "In the marketplace there's a move toward doing business in just that way, both among consumers and corporate customers," he says. "It's just an easier way to do business."
And it's not just easier for customers. It's vastly cheaper for vendors. A customer phone call to Dell costs the company about $25. When a customer uses dell.com, the cost isn't zero, but it's a lot less than $25. For a business that deals directly with customers, the advantage of driving customers to the Internet-and using the Net to make internal processes more efficient-is beyond obvious.
Dell's relentless marketing machine will serve the company well in its quest to drive Net sales. Dell is one of the biggest advertisers in the business-in trade journals and IT books, as well as consumer computer pubs, where readers would be blind to miss Dell's consistent back-cover placement. This summer the company also embarked on a massive, if perhaps ill-conceived, image campaign. And a significant portion of marketing dollars moving forward will move customers to the Net.
To grasp how Dell expects to reach 50 percent Internet sales, it's important to understand how the company views its markets and how it sells into them. Then it's useful to see how Dell ventured onto the Net in the first place, and why the move was such a hit before anyone realized what had happened.
Dell's penchant for direct marketing is well known. It practically invented the genre. When selling computers from a dorm proved successful, Michael Dell advertised in computer books, and the business took off. Over the years the company became known for selling powerful machines at reasonable-but not the lowest-prices, with strong support after the sale. Except for a brief dalliance with an Intel clone microprocessor several years after the company was formed, Dell has resolutely stuck to a formula of selling machines powered by Intel microprocessors and running Microsoft operating systems.
Dell diverged from its direct model with a channel sales effort a few years ago, but ended that experiment in 1994.
Dell doesn't see itself in a single business. It looks at various customers in different ways, and literally runs different business models-and different marketing methods-to address them. By Dell's reckoning, there are two major kinds of customers: "relationship-based" and "transactional."
The transactional customer base consists of two segments, consumers and small businesses. In both cases, direct marketing brings advantages, particularly given the customers Dell covets. In the transactional space Dell makes out because the majority of its consumer and small-business customers aren't first-time buyers. This benefits Dell financially because it pays little attention to the low-margin, sub-$1,000 market.
Experienced computer users are also much savvier-and they're unusually willing to visit the web site. So instead of having its online-sales percentage dragged down by first-timers, who almost by definition aren't online, Dell sees its percentage raised by experienced users shopping for replacement PCs.
Like its competitors, Dell makes its big money in the "relationship" part of its business, i.e., segments such as the enterprise, government and education. Naturally, such customers don't look in the back of a computer magazine and suddenly decide to pick up the phone or click a mouse to order 100, 1,000 or 50,000 computers plus networking gear and servers. It takes world-class sales-schmoozing, image advertising and a great deal more to win the accounts-and then, in many cases, serious wheedling to persuade customers to move their buying online.
Scott Eckert, director of Dell Online, has been involved in the company's web sales from the beginning, back in the Jurassic Era of e-commerce in mid-1996, when Dell launched its online store. While Eckert smartly credits his CEO's undying support, Eckert himself has been a driving force online.
"We studied the market to understand whether customers were using the Internet," he says. "In those days the web was just emerging into a mass market. We saw that Dell's customer set was already using the Internet as part of the computing experience, from consumers up to IT organizations." But when it came to actually buying computers and other gear, it was still an open question whether customers would feel as good about reaching for a mouse as a phone.
An internal skunk works team of a dozen launched the Dell online store in July 1996. It was an immediate success, and hit sales of $1 million per day early in 1997. The Christmas rush never stopped, and by the end of fiscal Q2, web sales were up to $2 million a day; by the end of fiscal 1998, they hit $4 million.
Eckert and his colleagues have established three goals for dell.com: Make it easier to do business; lower costs for Dell and the customer; and enhance direct customer relationships. Transactional customers bought in almost immediately once they discovered the web store. Eckert says the web effectively pre-qualifies a prospect by answering most of the questions the customer may have.