Lower margins needn't mean low profits
- 21 August, 1996 14:20
Regrettably, though unavoidably, margins on hardware have fallen dramatically. Whereas just a few years ago hardware margins were in the high twenties, they are now 10 or 12 per cent and sometimes lower. A key reason for the fall is the current lack of differentiation between products which has forced manufacturers, and resellers, to compete solely on price.
To counter this downward slide, the channel is moving in one of two directions. Either into the retail area, encouraging customers to come in, look around, and make a rapid purchase. Sale times are short and it is not necessary to have highly trained staff. This is the model perfected by mass marketers such as Harvey Norman. It offers "value" to consumers typical of larger retailing chains.
Alternatively, one becomes a solution seller, building a sale around a complete package including software, support and training. Then the low margin on the box is balanced by the higher margin on the "value" components in the total package.
Succeeding in the mass market
IDC's figures clearly indicate that future growth will come mainly from the home market (parents buying computers to enhance their children's education) and the SOHO market (people starting and operating businesses from their own homes). So while the corporate and government market may be saturating, there is still enormous potential for selling into this burgeoning home marketplace.
But with hardware margins at around 10 per cent, retail is a tough arena and it's here that Harvey Norman's approach is instructive. Successful mass marketers cater specially to first- time computer buyers, customers who know very little about computers apart from what they've read in magazines or heard from friends. They are reluctant to walk into a specialist computer store because they're afraid of being intimidated by a computer nerd talking jargon to them.
But they do feel comfortable in a large chain store where they can browse and may even have purchased a television or stereo previously. They don't mind paying a premium for being able to shop in that psychological comfort zone, allowing the mass merchant to protect their hardware margin by maintaining RRP as much as possible.
Crafting individual solutions
Solution selling is the opposite side of the coin. Here, the emphasis is on tailoring a combination of hardware, software, training and support to meet a specific customer need.
Obviously the sales cycle will be considerably longer and the staff need to be knowledgeable and well-trained. The SOHO market is not the sole preserve of the mass merchant since many small businesses require the specialist reseller's expertise.
While trying to maintain their hardware margins, the solutions seller can reduce the margin parts of the solution package. In particular, properly structured training and support contracts can be extremely lucrative.
Retail solutions . . . or both?
In the simplest terms resellers have to say: "I can no longer be all things to all people; I must decide whether to play in the retail area or in the solutions area." Business, however, like life, is rarely simple and some of Apple's larger channel members - such as Logical Solutions - have devised a way of playing successfully in both markets by clearly differentiating between the two.
One strategy is to operate a ground floor retail outlet catering for the home and SOHO markets while locating a solutions arm on another floor of the same building. Both groups operate as individual business units with their own profit and loss statements and both units benefit from back office efficiencies in inventory, management and post-sales customer support. But this approach still relies on the understanding that each area requires a different style of selling and a different management approach.
Whichever strategy you decide to adopt, the underlying philosophy is clear: retail selling and solutions selling rely on totally separate business models. Confusing the two will almost certainly prove fatal.
Steve Rust is General Manager, Apple Computer Australia