The Marketing Book 5th Edition

Managing the marketing mix 311

A good example is Dell Computer Cor-
poration. In 1994, Dell was a minor player in
the US PC market with a share of 4 per cent; in
2002, it had become the dominant player with a
market share of 25 per cent, twice as large as its
nearest competitor, Compaq. Furthermore, it
was the only PC manufacturer making a profit;
in fact, during the 1990s Dell had created the
greatest total returns for shareholders of all US
companies, with a share price increasing by 85
per cent annually. The basis of Dell’s success
was its initiative in changing the traditional
distribution model. Dell cut out the retailer and
sold direct to customers. Instead of holding
stock, its PCs were made to order. Dell got paid
weeks before it paid suppliers. Dell illustrates
how changes in this element of the marketing
mix create value first for consumers and then
for shareholders:

For consumers:

1 Convenience. Customers can order 7 days a
week, 24 hours a day.
2 Lower prices. By cutting out the retailer, Dell
took 25 per cent out of the cost of selling a
PC; half of this saving was passed on to the
customer.
3 Customization. Customers could design the
specification of the PC to meet their needs.
4 Customer relationships. Dell built a one-to-one
relationship with customers, providing the
basis for continuing support and new business.

For the supplier:

1 Higher prices. By eliminating the middleman’s
margin, Dell created the virtuous circle of
being able to charge customers about 15 per
cent less but receive 13 per cent more
revenue per unit.
2 Lower costs. The company was able to save
millions of dollars by replacing brochures, sales
and support staff with on-line help.
3 Minimal investment. Its build-to-order model
meant that it held no inventories.
4 Reduced investment risk. Traditional suppliers
could have PCs languishing in the retail chain,

often for months. With rapid technological

change, stock had often to be discounted to

clear, resulting in costly profit write-offs. This

reduced vulnerability acts to reduce Dell’s cost

of capital.

5 24-cash cycle. Customers paid for the machines

before Dell paid its suppliers, eliminating the

need to finance working capital.

6 Brand protection. Because the customer

relationship was with Dell rather than the

retailer, it had greater control over the

presentation and positioning of the brand.

These features – higher operating margins,

lower investment requirements, faster growth

and a lower cost of capital – translate directly

into additional shareholder value:

Traditional

PC Co.

Dell

Price to consumer (£) 1000 850

Retailer margin (£) 250 –

Price received (£) 750 850

Operating costs (£) 730 700

Profit (£) 20 150

Selling 10 million PCs a year, this amounts

to an additionalpre-tax cash flow, over tradi-

tional suppliers such as Compaq or Apple, with

a present value of £13 billion – approximately

the value of Dell’s value premium.

Summary

1 The marketing mix is at the core of marketing.

The marketing mix consists of the key

decisions where marketing managers should

exhibit their greatest expertise and

professionalism. It has become common to

summarize the elements of the marketing mix

in the four Ps – product, price, promotion and

place. Some writers have suggested adding a

fifth P – people – to highlight the service

element in marketing.