Letters to the editor: Stop dreaming about the bottom line
- 21 April, 1999 13:05
I am by nature a happy person - an eternal optimist and, yes, my glass is always half full.
But I know that I too have been guilty of (possible) overreaction to the woes of the computer industry. You are dead right - it's not all bad out there. The great majority of computer resellers do try but there are two main problems to be addressed:
Margins are now so low (caused by the incredible consumer awareness of "street" prices due to the Internet and by distributors going direct and cutting out the reseller) that resellers simply can't afford to provide sterling service, wonderful after-sales backup and warranty replacement parts (on the spot). They would simply go broke.
The second problem is that many resellers simply don't know how to run a business in such a cutthroat, competitive environment and how to ensure they will stay in business.
I recently spoke to a reseller who decided about two years ago that he would enter the discount melee. He had proven that he could be competitive in the low end of the market if he added 10 per cent to his cost, advertised heavily and sold good volumes of systems. I showed him that he would have to sell at least 40 systems a week at that margin to cover his costs - he had thought that 20 would have been sufficient. But as he didn't have a good accounting system - his view of his business's health was more based on gut feel and his bank balance - he felt that I was too pessimistic. Besides, he could still make "super" profits from accessories, services etc. A year later his margin was down to 5 per cent on everything - not just computer systems.
Anyway, he proved only one thing before going into liquidation: he could sell volumes of systems, but the margins were ultimately too low to pay the bills. On the other hand, my company, Techmart, probably sold half the volume but at more than twice the margin - and we have legions of happy clients prepared to pay for service. He has legions of unhappy clients with warranty woes and no support.
I have been calculating the costs of having a showroom, employing sales staff, staying open six days a week (plus late night shopping), advertising to get customers in the door, providing support and after-sales service, carrying stock, running a workshop, being honest and ethical and offering two- or three-year warranties. These things are all part of the "deal" that consumers expect from their computer supplier.
Now I know that this is a broad generalisation, but I can't see how an average reseller can stay in business, let alone make a profit, at margins of less than 25 per cent to 35 per cent. They also forget that a 10 per cent return on investment (read net profit) is what businesses need to stay in business.
Sure the required margins vary a few points according to the size of the business, its turnover etc, but the same figures keep coming out of the spreadsheet model regardless of whether it's a two-person tin-shed operation or a 25-person retail outlet. The only variable is how many systems and at what margin you have to sell a week to stay in business.
So why am I writing to you? Because too many resellers simply don't understand this message. What to do? Make it compulsory for computer resellers to attend adult education classes on business management.
Frankly, that's the main problem - not a lack of goodwill and trying to do the right thing by customers.
Intermedia (Distribution) and Techmart