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[ The PC Guide | The PC Buyer's Guide | Understanding PC Sources, Vendors and Prices | The PC Industry, Vendors and The Market ]

The PC Industry

The PC industry is one of the strangest in the world. There is probably no other type of product that is so technologically sophisticated, sells for so much money, and yet is sold by so many companies for so little profit. The severe competition in the industry is the #1 reason why so many problems are encountered by those who deal with PC vendors. While I consider there to be absolutely no excuse for a company not treating its customers fairly, at the same time I think customers should have some idea of what vendors are up against in this demanding marketplace.

Here are some of the most important characteristics of the PC industry:

  • It Is Very Price Competitive: By far, the most important thing to remember about the PC industry is this: it is one of the most competitive in the world. The main reason for this is the simple fact that making a PC is just not that difficult. Most are assembled from standardized components and not a lot of expertise is required. There are few barriers to entry to the market, meaning it is easy to set up a new PC company. As a result, there are tens of thousands of companies making PCs that perform similar functions. This causes the market to be extremely price-competitive. Most of the other characteristics of the industry follow directly from this fact.
  • Systems And Components Sell With Low Margins: Since the market is so competitive, vendors often sell at very low margins. Computers aren't like many other products, where the company selling the device is making upwards of 50% of the price of the product as gross profit (meaning, profit before overhead and general expenses). For PCs it is more like 10% or less. Many people buy a $1500 PC thinking the vendor is making, say, $500-700 on the item, and they find it hard to understand why these companies aren't getting rich. It's more typical for the vendor to make less than $100 profit on such a PC. Some small companies make virtually no profit at all on straight PC sales, and survive on post-warranty support and consulting!
  • The Market Experiences Rapid Price Fluctuations: There is probably no other industry that has prices change as dramatically and frequently as the PC industry. Usually, prices are decreasing. This is good for the consumer but very bad for vendors, because it means that their already low margins get squeezed if prices drop between the time that they buy a product and the time they sell it. It's not unheard of for a vendor to buy a component wholesale at price $X and find 24 hours later that the retail price has dropped below $X! The vendor must then try to dump the product as fast as possible to limit his losses. You won't find many industries where this occurs with regularity.
  • Vendors Keep Low Inventories: In an environment where margins are low and prices are generally dropping, keeping high inventory is a death sentence--whenever prices drop the vendor potentially loses money on every component in inventory at the time. For this reason, most companies try to keep as little in inventory as they can get away with. See this section for further discussion of this phenomenon and its implications.
  • Vendors Contend With High Bankruptcy Rates: Because of all the challenges involved in running a PC business, the bankruptcy rate is high. Many vendors have been in business only a short time. Some open a store, have it fail, and then open another one with a new name, sometimes year after year.

Well, now you have some idea of what a PC builder or vendor has to deal with, especially a small company. Sound like a fun business to run? I have been approached in the past by those who suggested I should start building high-performance systems and selling them; the bullet points above are the reasons why I wouldn't consider it while I am still in my right mind. :^)

Next: Vendors and Inventory

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