That, in essence, is the strategy from which Gateway has never veered. By keeping careful track of costs, and pricing to achieve a fixed margin, Waitt could add newly affordable features and still keep prices down, as other components shuffled along what he calls "the value curve." No matter how technical he makes it sound, though, what Waitt was really doing was gambling on his gut-level ability to divine what his customers wanted. It was he -- and he alone -- who decided what features mattered. Would customers pay an additional $75 to own a 40-megabyte hard-disk drive? "The first question would always be, Would I buy it?" says Ham mond. "Everyone wants smaller, faster, and cheaper. So it's a fairly educated guess." Then Gateway would test the component to see if it performed as the manufacturer promised. From there, says Waitt, "we didn't do a whole lot of market research on it. A lot of it was instinctive."
How good are Waitt's instincts? The company grew from $1 million in 1986, to $1.5 million in 1987 -- with the boost of the trade-in offer -- but sales exploded to $12 million in 1988. Waitt made it clear, though, that he was not about to sacrifice any profitability for the sake of adding overhead. The Waitt brothers did move the business into more spacious quarters, paying $350 monthly rent for 5,000 square feet in Sioux City's 100-year-old Livestock Exchange Building, where they had to sidestep cow manure in the halls. They found they could start employees at $5.50 an hour -- in 1988 Gateway began supplementing that figure with a monthly cash bonus based on profits -- and turnover was nonexistent. Gateway needed no research-and-development function and no design team, and there was plenty of used furniture around. South Dakota, where Gateway moved in January 1990, collects no income taxes. In a business where margins can expire of emaciation -- Gateway's publicly owned competitors report net aftertax profits of no more than 5% -- Gateway needed every advantage it could scrounge.
But its greatest advantage, perhaps, was Ted Waitt himself. As his brother notes, "he has an uncanny ability to figure what people will want and how to package it." His biggest mistake so far, selling a disk drive that was ahead of its time, was "expensive, but not catastrophic," he says. It's a balancing act: keeping track of the emerging technology and still lowering prices about a half dozen times a year. "I look at all the information, and I assimilate it in my head," Waitt explains. "Usually, the right answer just pops right up."
Or, as Hammond succinctly explains, "it's kind of a crapshoot."
* * *
With all his talk about the value equation, Ted Waitt would have you believe that Gateway got where it is today -- 1991 sales are projected to hit a boggling $600 million -- by giving consumers more for their money. Which is true, sort of. Seymour Merrin, whose company publishes a newsletter covering PC-distribution channels, notes, "They've done a great job of convincing people that they have a great product at a great price."
In most quarters, they call that advertising.
Here, Waitt has gambled on his own idiosyncratic tastes, ignoring advertising conventions. In fact, Gateway's ads have sometimes not even shown its own product.
Back in his retailing days, Waitt had helped enough people shop for PCs to know they wanted to feel that a stable company stood behind the machine. Waitt's positioning trick -- and it was masterly -- would be to establish Gateway as a trustworthy company that also offered rock-bottom prices. Low-end, but not scary.
The customers who were willing to buy PCs through the mail were a select and sophisticated bunch; usually, they determined the quality and support they needed and then shopped for the best price. To find it, they were willing to risk the hernia-popping experience of lifting -- and the eye-numbing experience of leafing through -- publications like Computer Shopper, which could run to 800-plus large-format pages. Waitt couldn't help noticing that the ads were lacking in sophisticated advertising tools -- like, for instance, cows.
Cows? Waitt's first Gateway ads actually featured a picture of his father's cattle herd, with the Sioux City water tower hovering protectively in the background. "Computers from Iowa?" the headline read. Rather than sell the product, the ad -- variations of which ran until October 1989 -- sold Gateway. Waitt knew whom he was selling against; well, not exactly, since ease of entry meant that competitors were always breezing in and out. But many of the clone makers were of questionable reputation, and their long-term intentions fell short of noble. Waitt's copy, which has come to sound like something Tom Bodett might read on those radio ads for Motel Six, established Gateway as a bunch of plain folk who planned on being around awhile. There was some not-so-subtle psychology at work: here was an American product, not one of those no-name Taiwanese or Korean clones, and wouldn't you rather buy from the honest heartland than from either of America's cynical coasts?
