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Zero margins are coming

Zero margins are coming

How long before margins are reduced to zero in selling standard PCs, peripherals, software and basic networking hardware? I don't think it's out of the realms of possibility to predict that within a year a sizeable proportion of IT products bought will be sold at zero, or as good as zero, margins.

Our front-page exclusive report on how Voice Trend Technologies has established an Internet reselling business at very little cost could be one of the most important stories of the year. It is almost certainly a sign of things to come.

While today Voice Trend Technologies is selling at recommended retail prices, the Express Data Web offering will soon enable the proprietor, Alan Ha, to set his own prices. Ha can afford to sell at very skinny margins because his operating costs are minimal.

Voice Trend Technologies certainly won't be the only online retailer to have a crack at this model. All of the major distributors have hinted that they will allow resellers to Web front-end their distribution systems sometime in the future. Some, like Ingram Micro, have already introduced the same model to other parts of the world and have confirmed it's only a matter of time before it hits Australia.

As more and more of these pseudo-Web retailers emerge, it won't be long before they start to compete aggressively with each other and margins will plummet towards zero.

Also, let's not forget that Wholesale Direct has been selling at zero margin for more than a year. In early 1998 it set up a model where it sold to Web consumers at Tech Pacific prices, with the aim of making money by onselling non-compulsory services and support.

Then there's the model that has just emerged in the US favoured by Buy.com. It sells everything at basically zero margin and makes its revenue from banner advertising.

Add it all up, and in terms of product margins it's a pretty depressing picture. Of course, if products need to be configured and integrated, they are more difficult to sell over the Web. But it won't be long before Voice Trend Technologies and similar resellers can ship configured equipment as Express Data and other distributors are quickly ramping up their configuration and build-to-order services.

Distributors are looking to carve out their value-add to justify their slice of the action by pushing their way into the low-level services market. With their economies of scale, they can do configuration and such services cheaper and arguably more reliably than resellers can.

So for resellers it gets back to the old chestnut of knowing exactly what the value is that you are providing and being better than anyone else at providing that piece of the solution.

I know a lot of resellers are desperately trying to reinvent or transform their businesses to make the transition into the Internet age. Every business is. My only advice is to assume the worst, that your fears are going to be realised tomorrow and to try and plan accordingly, because everything is going to change faster than most would imagine.

Philip Sim is editor-in-chief of Australian Reseller News. Reach him at philip_sim@idg.com.au


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