In October of 2017, chip giant Intel (NASDAQ: INTC) released a new family of processors, known as Coffee Lake, for the desktop personal computer market.
The initial wave of chips and related platforms was primarily targeted at computer enthusiasts and gamers, with the company releasing Coffee Lake-based products for more mainstream consumers earlier this month.
Image source: Intel.
Considering, though, that sales of chips to gamers and other computer enthusiasts are growing despite a sluggish overall computer market, this segment is increasingly important to the company. Intel's goal is to, of course, capitalize on this market as best it can.
In this column, I'd like to go over how Intel's product segmentation strategy with respect to the Coffee Lake chips for the enthusiast/gaming market has been very successful.
The goal of product segmentation
Intel builds different products with a range of performance levels and features for each of the markets it serves. The idea is to have compelling products with good cost structures at each price point, while at the same time structuring the product line in such a way that prospective customers find value in paying more to buy the higher-end product if they've got the money to spare.
A good segmentation strategy achieves three goals: It allows a company to maximize its shipment volumes (a product for everyone), its profit margins (the products at different price points have cost structures appropriate to their selling prices), and its average selling prices (customers who can spend more will find value in spending more for the highest-end products).
Enough theory now, though -- let's see how this applies to Intel's latest Coffee Lake gaming processors.
Intel has three gaming/enthusiast-specific Coffee Lake processors in the market today: Core i3-8350K, Core i5-8600K, and Core i7-8700K. I've provided a brief set of specifications and pricing for these chips in the table below:
|Base clock/max turbo||4.0/4.0||3.6/4.3||3.7/4.7|
|Cache||8 MB||9 MB||12 MB|
|Price (Newegg.com)||$174.99||$259.99|| |
Data sources: Intel, Newegg.com.
You'll notice very clear improvements as you move up the product stack: The Core i5 has more cores and cache than the Core i3, and it runs at a higher frequency out of the box. Same deal with the Core i7; it has more threads (think of these as virtual cores), more cache, and once again runs at higher speeds.
Customers aren't likely to look at these specifications and think that, say, the Core i7 is just a minor improvement over the Core i5 when the former is better than the latter across virtually every marketable metric.
So, how does this segmentation strategy work out in practice?
A rousing success
On Amazon's best-selling desktop processor list, the Core i7-8700K holds the top spot. The Core i5-8600K occupies the fifth spot, while the Core i3-8350K doesn't even crack the top 100. On Newegg.com, both the 8700K and the 8600K are among the best-selling chips, but the 8350K isn't anywhere in sight.
What this evidence seems to suggest, then, is that Intel's segmentation strategy within the enthusiast/gaming community is a clear success: People are buying the i7 8700K over the i5 8600K, and they're buying the i5 8600K over the i3 8350K.
That anecdotal evidence is supported by Intel's claim last quarter that it, yet again, saw "record Core [processor] mix and record [Core] i7 volume in the fourth quarter."
I've got to hand it to them -- Intel's sales and marketing teams know what they're doing, and that competence allows them to make the most out of the products its engineering teams build.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Ashraf Eassa owns shares of Intel. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.