[ale] [Fwd: Ale Digest, Vol 173, Issue 1]

[Daniel Howard]

 >Daniel Howard >Wrote:you can always charge less and make a lower 
margin for an
> item you expect to sell many more of,

 >>I find this hard to believe in this instant.  You basically take the
same hardware and install a different OS on each computer.  Once you've
installed it once, repeating that process is quite simple.

I still say the flaw in thinking here (and I used to think this way too 
before working for a chip manufacturer) is cost based pricing vs. market 
based pricing.  Just because the product costs less to build does not 
necessarily translate into lower retail price, and in electronics more 
often the opposite is true for initial product launches in order to more 
quickly recoup development costs.  For large companies, a new product 
(or even a variant of a existing product) must demonstrate that it will 
generate a certain net revenue before it can be approved for launch. 
The larger the company, the larger this threshold is, and it can be over 
$100M for the really big companies.

So, the Dell guys proposing a Linux product had to generate a 
spreadsheet that showed at least a certain threshold of net revenue to 
management before they'd approve it.  If the expected number of units 
sold per year is low compared to current lines, then to make up for that 
and to pass the revenue threshold, they'd have to pad the retail price 
and justify why the market would bear that price.  I would speculate 
that the presentation went along the lines of "Our first customers for 
these systems will primarily be current Linux users who hate the notion 
of paying MS for anything, and they also feel that in the long run the 
system will be more reliable and take less support, so they'll be 
willing to pay more up front for it, etc."  And if that justification 
included "and this way we won't upset MS," then it was merely another 
justification, but in the end it's all about showing that a new product 
will generate enough revenue to justify launching it, and that there is 
sufficient growth potential in the product, as opposed to being driven 
primarily by MS concerns, large as they may have been.  But they did 
take the first step, and Linux revenue for Dell is reportedly meeting 
expectations, meaning they were right about the initial market bearing 
the higher price, even knowing that it was not justified on a cost 
basis, so kudos to them IMHO.

Best, Daniel