Dell Ends Free Shipping to Residential Customers

Computer maker Dell (Nasdaq: DELL) is ending its long-standing practice of offering free home delivery of personal computers, a move seen as an effort to protect its historically robust bottom line from price competition.

Though Dell has remained among the most profitable computer makers, its most recent earnings report in August showed slowing revenues and the company may worry about the impact that even a slight slowdown could have on profits.

No More Door-to-Door

The change takes effect on Oct. 10. After that date, the company will still ship purchases for free if buyers are willing to pick them up at their local post office branch. But if users want to have them shipped to their doors, they will face an extra delivery charge.

The new approach takes advantage of a U.S. Postal Service offering unveiled this week, called "hold for pickup." The service is being billed as more convenient for consumers who are not home during daytime delivery hours, since they can pick up packages at their local post office within 10 days of their arrival.

Dell said it had not worked out pricing on home delivery yet. Dell has long offered customers the ability to upgrade their shipping to faster delivery options that run as much as US$99 on basic systems for those wishing to have their purchases in as little as three days.

The Shipping News

Whether the shift represents any significant cracks in Dell's notoriously efficient direct-sales business model remains to be seen. But what's certain is that Dell is not alone in wrestling with the issue of how to handle shipping costs.

Amazon.com (Nasdaq: AMZN) has tried various approaches to make free shipping work for its top and bottom lines, with mixed results to date. It boosted sales by dropping its minimum purchase price to qualify for free shipping to $25, but has continually said that the offer hampers its ability to stay in the black. It also tried a different approach, letting users pay a one-time annual fee for the privilege of having free shipping on all purchase. The report cards on that service are similarly mixed.

E-commerce analysts say shoppers are typically willing to pay extra for shipping, but prefer to know early on in their transactions how much extra the delivery charges will add to an item.

"They want to be able to compare apples to apples," said Forrester analyst Carrie Johnson. "The bottom line is what matters in terms of whether to make a purchase online or at a store."

Retailers with brick-and-mortar presence often offer in-store pickup of items bought online, usually at no extra charge, Johnson noted, something that Dell, which has largely foresworn a retail presence, cannot do. Still, she added, consumers have been drawn to the speed and convenience of buying online and that's unlikely to change significantly even with the change in shipping arrangements.

Aiming Higher

Dell's shipping decision comes as the company seeks ways to convince consumers to buy higher-end computers. Company executives noted recently that while Dell can compete effectively on rock-bottom priced machines, it would rather convince consumers to upgrade.

To that end, Dell recently unveiled a line of souped-up PCs aimed at the home entertainment segment. The new XPS brand line also includes television sets and flat-screen displays that start a prices well above the low- and mid-range offerings from Dell.

The move to the higher-end market likely reflects the changing competitive landscape, with the revamped Gateway and Lenovo, which bought IBM's (NYSE: IBM) PC business earlier this year, among those able to compete head-to-head with Dell on price, analysts said.