PC guide 2

Understanding PC Sources, Vendors and Prices

Once you have determined what your system requirements are, and you've selected hardware to meet your needs, you must figure out where you are going to get the PC (or components) from. The PC industry has grown by leaps and bounds over the past few years, based on the explosive growth in interest in computing. This is very good for the customer, who has more choices available now that at any time in history. It's also bad for the customer, because it can make it very difficult to figure out whom to buy from and why.

In this section I will attempt to provide you with all the tools you need to really understand how the PC industry works and how to choose a good vendor. This begins with a look at the PC industry and the PC market, a very confusing and complicated place. I then discuss different sources for PC systems and components, and talk about the better (and worse) ways of doing research into vendors and prices. Finally, I provide an exhaustive (but hopefully not exhausting :^) ) examination of the different factors you should keep in mind when selecting a vendor.

The PC Industry, Vendors and The Market

One of the reasons that many people have bad experiences dealing with vendors and find the PC buying experience horrible is that they don't comprehend the machinations of the PC industry, surely one of the more "interesting" markets in the world. :^) Many problems with vendors are caused legitimately by the vendors being careless or unscrupulous. But in many cases you can avoid problems by understanding better what the industry is like, and what the vendors are thinking and trying to do (aside from getting your hard-earned money!) What I am saying is that the vendor isn't always the "bad guy", and in any transaction it is only advantageous to have an awareness of the other party's position.

In this section I explain a bit about how the PC market works. This includes some general comments on the PC industry as a whole, a look at vendors and how they deal with inventory and costs, reasons for considering a long-term relationship with a vendor, and also a reason to consider buying from as small a number of vendors as possible.

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. :^)

Vendors and Inventory

As mentioned in the previous section, the rapid price drops and low margins in the PC industry mean that PC companies can't afford to keep significant inventories of components and systems if they are to remain profitable. This means that in many cases, companies don't stock the items they sell. Even when they try to keep items in stock, they generally have low stock levels, resulting in items going out of stock frequently, especially when they are in high demand.

The more honest companies will acknowledge this up front, and in many cases it is worth going to a vendor who can give you a better price because his inventory is kept low, rather than paying the inventory carrying costs of another company. If a reputable vendor says "I don't have it in stock but I can order it today and have it shipped out tomorrow" then that vendor is probably being honest with you. In some cases the item can be drop-shipped from the wholesaler or distributor so you get it as fast as if the vendor had it in stock: so-called "virtual warehousing", which is becoming increasingly popular today.

The problems occur when companies try to "have their cake and eat it too"--they don't want to carry inventory, but they want their customers to think they have inventory so they will get orders for items that are supposed to be in stock. Some companies will in fact blatantly lie about the stock status of many items. They will say the item is in stock and then order it after you have already given them your credit card number; then you end up waiting for the item to come to the company when you think it's already on its way to you.

Other unethical vendors make you wait even longer. They will take an order and not even order the item from their supplier until they have "accumulated" enough orders of that particular item. This is done so they can get better pricing from their suppliers on larger quantity orders, or to save on shipping costs. This behavior is unethical, but it is done far too frequently by the less scrupulous vendors.

Again, not all vendors do these things; better vendors do not engage in this sort of behavior. What all this means to you, the consumer, is that you must be doubly sure to find out at the time that you order anything, whether or not it is in fact in stock and if not, when it will be in stock. Don't let the vendors push you around. See this vendor selection section on stock levels and out-of-stock policy for more. And if you have trouble with a vendor that claims to have something in stock but turns out to be lying, see here for some ideas on dealing with it.

Understanding PC Buying

It is essential to understand that buying PCs should not be approached in the same way that you would purchase another consumer electronics item like a dishwasher, television set or car stereo. When you buy one of these other items, you generally have a pretty good idea of what you are getting, and what will be included. Sure, the products will vary in terms of size, features, styles and colors, but at its core, the product performs one basic function and all the different models are fairly similar. In addition, the units are sold in pretty much a "take it or leave it" fashion--you can't walk into an electronics superstore and say "I'd like that dishwasher but I want the top and bottom racks switched, and I need it made 4" shorter so it will fit under my countertop".

In contrast, PCs aren't "integral wholes". Well, some are sold that way, especially retail "PCs in a box", but in reality, PCs are made from fairly standard components. They are also highly customizable, assuming you buy from a source willing to let you exploit this key advantage. In many ways, PCs are more like cars than they are like car stereos.

While companies try to build brand loyalty by making consumers think there is something inherently superior to their machines, this is usually not the case. There is little "magic" in a particular brand of PC compared to another. What the PC's hardware really boils down to is the sum of its components. The brand name or the company are important, but primarily for quality and service considerations.

Note: Notebooks are different in this regard because they are not usually made entirely of standard components, and their functionality and quality does depend on manufacturer-specific designs to a large degree.

Since PCs are assemblies of components, the component "packages" must be studied carefully. Some PCs come with all the components and peripherals needed to make a fully-functioning system; others do not. There is a huge difference in value between a PC that includes a printer, sound card, modem and speakers, and one that does not--assuming you need those components. But the ads will just say "New PC!" and provide a long list of features.

In an attempt to make their products attractive with low prices, some companies employ tricks such as the infamous "monitor not included". Often the PC will be pictured with a monitor, and an asterisk leading to text written in a tiny font informing you that the monitor costs extra. In my opinion, this is deceptive advertising. It's like seeing an ad for a car and then finding out you have to pay extra for the steering wheel and the brakes. Make sure you find out exactly what's in the package.