In an effort to determine why inkjets remain the dominant technology in the printer game, Agnes King went out on a limb and declared that margins are not the be-all and end-all. She promptly got her head kicked in.
I stand corrected. Two weeks ago I issued an e-mail to the printing community saying that margins obviously don't matter that much to printer dealers because inkjets, on their scant margins, continued to dominate the sales board.
Inkjets 80: Lasers 20 - the figures speak for themselves, I said. Customers couldn't care less about your supposedly superb laser technologies, they want cheap and cartridge-hungry units and that's what you'll continue to feed them.
Well, it appears that things aren't so clear-cut in printer land and resellers continue to astound with their ingenuity in squeezing an additional five or 10 per cent profit out of a $200 sale. The most logical defence comes from Graham Harman, CEO of Office National, who flatly declares: "You can't eat turnover, you can only eat margin. The more margin you have, the less hungry you are. Reduced hardware margin leads directly to reduced customer services." Just for the record, the majority of resellers hate offering sloppy service; vendors and customers alike will be pleased to know this.
According to Harman, the secret to making the most out of a printer sale is to separate buyer groups and be aware of what level of product you can sell to each type. Not everyone who walks through the door has their heart set on an inkjet and for these cases you may be able to upgrade the sale to a low-end laser, but for some the $110-$200 price tag of an inkjet will prove too compelling. Dealers have to be prepared for this.
"We sell HP, Brother, Canon, and Kyocera Mita. This way we can sell the right product to the right customer [and have a better chance of] keeping them for life," says Harman. "We are looking at the printer purchase from a customer's perspective, which means considering three things: value for money, including total cost of ownership; features and benefits for the client's purposes; and reliability by servicing what we sell."
Even from a consumables supply perspective, hardware margins have a resounding impact in determining how long products will stay on the market. "Margins are crucial as they determine the profitability of the line," explains Paul Connelly, managing director of consumables supplier Daisytek Australia. "The challenge here is to ensure that we carry the market-leading products and try to make a profit out of selling them instead of using them as a loss leader."
Tricks to obtain more margin
Cassam Elrozz of Cherry Tech, a computer store in suburban Sydney, is consciously deterring customers from the Canon brand because the prices have bottomed out. "We will sell Canon if the customer really wants it, but at $110 retail we're lucky if we make $20 off it," he says.
Frank Moghaddas, general manager of Computer Express, agrees that Canon sales have the worst margins of a lacklustre bunch. "Due to their wide distribution, there is too much competition and therefore no margin. Resellers need price protection and vendors should enforce this. If resellers sell products below the recommended retail price, vendors should penalise them," he says.
In comparison, Moghaddas says Lexmark is more supportive, choosing a select group of distributors and sticking to a relatively narrow sales channel. Lexmark's products feature in 1400 retail outlets nationwide compared to many vendors that have double this number. Of course, this protection is limited as Lexmark still has to compete with its peers.
According to Stuart James, analyst for channel research group Inform, competitive pricing by vendors throughout 2001, in an effort to secure market share, greatly reduced the value take of the printer market. "The 16 per cent increase in colour inkjet unit sales over 2000 yielded only a marginal 1 per cent increase to this market's value," says James.
Elrozz aims to keep his margins at around 10 to 15 per cent, although to do so he has had to find alternate suppliers to the mainstream disties. "After the big distributors have added their 10-15 per cent margin, there is no room left for us," he says. "We can't add another 10 or 15 on top because the price would blow out and the customer would shop elsewhere."
Cherry Tech now orders via a wholesaler who imports product from overseas. "The wholesaler adds 5 to 10 per cent and we get to add 5 to 10 per cent," Elrozz says.
Buying from a wholesaler is not without its risks. For instance, dealers should check a wholesaler's reputation, whether or not they intend to honour warranties and whether they have a track record for actually doing so. If the product is branded, resellers can send it to the manufacturer's plant for replacement, although these are typically offshore, which makes it an expensive alternative.
Watching exchange rates is another area where resellers can pick up a few dollars, according to Moghaddas. "[We stock] HP but since the drop in exchange rates they are no longer value for money," he says. This is because HP's price lists are all in US dollars; the suppliers buy in US dollars from overseas and in turn charge resellers US dollars for stock.
Instead, Moghaddas is pushing Japanese brands because the Australian dollar is stronger against the yen. While he admits that the savings are not huge, a couple of dollars on hardware and consumables is the difference between a 7 and a 10 per cent margin. In this game, every little bit helps.
Still, before you start rushing out to sell Indian-manufactured paper to your loyal customers, spare a thought for quality control. Many corporations that sacrificed the tried and trusted Reflex reams for a cheaper brand in the name of smart spending' are currently suffering incessant paper-jams (apparently the paper doesn't get on too well with the drums). This not only frustrates the customer and diminishes productivity but also weighs heavily on the dealer's service arm and the vendor's helpdesk.
Failing real value, there is nothing like the perception of it; ARN happened upon a dealer selling inkjet printers at cost price and charging $15 for the cable.
No margins but great marketing
The next question after profit margins relates to the level of marketing dollars a vendor will commit. Of all the incentives offered by printer manufacturers, advertising budgets rate most highly because, as Moghaddas points out, the more product a reseller sells, the more rebates, freebies and staff incentives they are entitled to. While the Canons and HPs may have bastardised their channels no end, on this front they are nobody's fool. Canon in particular has offered resellers a substitute for margin in high-profile branding with its television advertising in primetime (6:00pm-8:30pm) targeting families that use colour printers for replicating photos and school projects. For resellers who aren't dedicated to pushing printing solutions but need a product in store to round out their kit-bag, this kind of marketing is invaluable.
Support those who support you
On the other hand, Office National's Harman says value-added resellers (VARs) that act in a consultative capacity should be given incentives by vendors. "Vendors should look at a serious price difference between their real supporters and those who take an easy order," he says. "VARs and dealers are consultative salespeople so often we tailor a solution to suit our client's needs only to be pushed on price by a retailer or reseller looking for an easy sale. We almost always get the business but often sacrifice some margin."
Particularly in the low end, feature sets have become so standardised that dealers are grasping at straws to differentiate one brand from the other. This situation is destined to become even more confusing if colour laser prices continue to fall.
"Manufactures will need to rationalise the range of products offered and develop clear differentiators to see real growth rather than brand switching," says Harman. "Alliances with established VARs and dealers will strengthen key points of difference which may be lost in the volume retail/reseller market."
Don't settle on service
Similarly, Harman says he will not support vendors that refuse him the ability to service product, as it removes his control over a customer's problem. "I never want to be in the predicament where I have to say I'm waiting for so-and-so vendor to get back to me," he says. "At the end of the day, the customer bought [the product] from me and they're holding me accountable."
In the case of low-end inkjets, Epson, Canon and HP pay Office National to swap the unit over. "If I did a strict P&L [profit and loss] it's really a break-even, but we want our client to think of no-one else but us," Harman says.
"I've gone and picked up units from the customer to take them to the third-party service centre, simply to ensure that all the customer sees is us."
Peripherals overtake PCs
The attraction of improved printer features combined with increased consumer buying power has led many consumers to update the peripheral devices connected to their PCs, according to Stuart James, of channel research group Inform.
In the home consumer segment, the popularity and advances in inkjet technology have seen vendors move toward adding specific features that take advantage of both the available speeds and photo-quality resolution and the increasing trend toward digital home photography.