AtenRa
Lifer
- Feb 2, 2009
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Losing a few points of market share would hurt the bottom line because loss of revenue hurts profits.
If previously I sold $100,000 worth of goods at 60% gross profit margin and it cost me $30,000 to develop and market the goods, then my gross profit margin would be $60,000 and my net profit would be $30,000 (net profit margin of 30%)
If I then sell $90,000 worth of goods at 60% gross profit margin, and it cost me $30,000 to develop and market the goods (these costs are usually pretty independent of volume, but not entirely as there can be some profit-dependent operating expenses), then my net profit is just $24,000 (26.67%) on gross profit of $54,000 (60%).
My gross profit margin percentage in this case did not go down, but my total profit -- and thus net profit margin, the number that actually matters -- did. Investors would not be happy to see Intel just "give away" a "few points of consumer market share" because it would negatively impact their total profit. Intel is even more complex because its gross profit margin depends on factory utilization rates, so losing volumes not only would lose them revenue, but lead to higher cost per wafer, negatively impacting gross profit margin.
With that said, let's get back to the idea of Intel's potential response. Cutting prices does negatively impact revenue because even if you still "get the sale," you sold for lower than you otherwise could have. Your gross profit margin goes down too because gross profit margin is defined as (Revenue - Cost of Good Sold)/Revenue.
This is generally an option of "last resort" when you've got nothing better to respond with.
The better way to respond is to "disguise" the price cut by introducing better products at the previous price points and pushing the older/slower products (or newly branded equivalents) to lower price points. So if your product isn't selling well at $350, you reduce its price to a price point that the market will bear and then you bring out a better product at that $350 price point.
Think of what Intel did with the Kaby Lake Pentium chips. Instead of cutting prices on last year's Core i3, they just put hyperthreading on the Pentium chips to improve their value proposition. The i3 chips got speed boosts as well as an unlocked variant at the previous price points.
This is a price cut, people instead of buying $110 Core i3 6100 will buy $65 Pentium G4560, they will not buy Core i3 7100 at $110. The difference is that 2+2 Kabylake dies are cheaper to make than 2+2 2015 Skylake dies due to manufacturing process cost depreciation + higher yields. So at the end you sell higher volume at lower prices but due to lower COGs you end up having the same profits (If you sell higher volume).
Intel is currently pushing DIY consumers in to two segments, sub $100 with Pentium G4560 ($65) and second segment at $200 and higher (Core i5). There is absolutely no reason at all to even consider any Kabylake Core i3 at this time (except Core i3 7350K for Overclockers).
On the HEDT they could actually launch higher clocked 6+8+10 core SKUs at the same price or lower prices of current SKUs to increase sales. But its the HEDT platform I see Intel having the most problems from ZEN , if 8/16 ZEN can reach i7 6900K performance at lower prices. Because if Intel price cuts the HEDT SKUs it will start to cannibalize its mainstream Core i7s, Core i7 7700K.