Bulletin Board: “Surviving just a little bit longer is not a strategy.”6 Feb, 2013 By: David C. Ramos imageSource
Everyone wants to change their business model from the hardware led model of yesterday to a services led platform of the future. Whether it’s MPS, MS, MDS or another acronym yet to be created, apparently it starts with the word “Managed” and ends in the word “Services.” The options for our channel are legion.
The Manage Print Services market, according to one analyst group, was forecasted to grow at a CAGR of 20.62 percent over the period 2011-2015. And unless you’ve been living under a rock, you have heard of Managed IT Services and the many options for entering that space.
One needs to look no further than the Xerox Corporation (the company that, through Chester Carlson, created the imaging industry) as an example of this shift to a services led platform.
With Xerox focused on the managed services space, today it accounts for 50% of their revenues. For the reseller who has not yet selected a Document Management solution for resale or has not yet focused on making it a core part of their business, they are said to have missed one of the most untapped markets. According to AIIM, IDC, and other industry analysts, less than 15% of the SMB market has a solution. When you consider that there are over 600,000 companies that fit the 20-500 employees-sized companies in the US that make up this SMB space, this represents a huge opportunity.
Trends and Statistics
Thinking in terms of new markets, not just cost cutting, is one of the fundamental elements to transform your business model. While trimming costs where you can (renegotiating prices with suppliers and distributors and lowering your overhead) is very important, under present day conditions in our industry, you have to look at levers that will change their market or create an entirely new one for their business. Surviving just a little bit longer is not a strategy; it will not create a competitive advantage necessary for business longevity.
But what if… in all the haste to shift the business model from our traditional hardware-led to services-based business model we missed the subtle changes taking place in our industry and committed an error? Therefore, putting the aftermarket annuity stream of our business model at risk. Basically, putting at risk the very lifeblood of our business model and the revenue stream that we will need to leverage in order to invest in those new initiatives to make the change needed to ensure our long term viability as a business entity. Think about it.
A quick historical review of the period of 2008 – 2012 for U.S. market trends for copier and laser-based equipment and marking supplies (courtesy of infoTrends) reinforces color’s expanded foothold in the office environment. While the US install base of monochrome equipment dominated (and continues today to dominate) at roughly 80% of the total, its gradual annual decline of 3-4% combined with the 10% annual growth rate of the color installed base over the period of 2008-2012, translated into color capturing an impressive 26% of the total install base total. Now the variables in any given market are subtle differences in these numbers based off a given dealership’s color participation in their marketplace.
Similarly, images produced on color equipment grew at a 12% rate over the same period, while total monochrome images declined at a 3-6% rate per year – resulting in color images representing 35% of all images produced. Further, the total value of color marking supplies (at point of sale) increased by 9% per year, while the total value of monochrome marking supplies decreased by 8% per year – translating into color marking supplies representing almost 65% of the total US supplies market.
While these trends are not surprising, they do reinforce the significance of color today and the projected command color will continue to have in the future. Yet not all is positive in the color arena. While the value-per-page (price-per-page) of monochrome supplies is projected to remain relatively stable going forward, the value-per-page of color marking supplies declined by 3 to 5% – which would represent about a 21% decline in value-per-page of color from 2008 - 2012.
Whether driven by fundamental changes to the install base (e.g. shifts to higher speed / lower price-per page segments or changes in OEM market share) or by the very nature of increased competitive pressure (intensified OEM vs. OEM price competition for share of market or increased proliferation of aftermarket supplies), the expected color supplies value-per-page erosion should also come as no surprise.
I know the benchmark for supplies is 50% gross margin in our industry. So, for an example, let’s assume supplies gross margin of 45% across both monochrome and color segments, a 3% color value erosion per year without comparable cost erosion - combined with the growth of the color category to 65% of total during the period of 2008 – 2012, would represents a negative 3.45 percentage point impact to your organization’s supplies profitability. So what can be done to address this challenge?
- Recently, in the December issue of imageSource magazine, Dr. David Cameron highlighted his recent study on the color aftermarket in the article, “A Study on Assessing Aftermarket Color Toner Readiness. “ Until recently, there has been a sea of distrust, uncertainty and misinformation about reman color cartridges. It was due in part to a spotty history of inconsistent quality and uncertainty between batches. Also, dealers had nowhere to turn for an unbiased and trusted answer to the burning question, “Is reman color ready for prime time?”
- Regardless of product quality and reliability, gaps in the aftermarket product offering remain in the color space; particularly in copier-legacy OEM portfolios where full product design (toner, components, and cartridge) is often required, but also in some niche printer-legacy OEM lines where full component solutions and/or sufficient core access remain elusive. Additionally, end-users continue to have a heightened sensitivity to color print quality, so the missteps of color aftermarket products and the current variability of aftermarket color product quality, continues to fuel end-user reluctance to select (or accept) something in a non-OEM box. A leaking color cartridge or a print quality defect associated to a cartridge that arrived in a different or “premium” box will most certainly be noticed by an end-user – even if the one from the OEM box occasionally has an issue of its own.
While selecting the right color partner for your needs is obviously critically important, converting a portion of your OEM color supplies - specifically which product types and to what degree - to this trusted OEM-alternative color source, is likely equally important. Whether you utilize aftermarket color supplies for (1) legacy printer applications, (2) unfamiliar OEM equipment acquired through a recent MPS victories, (3) secondary, non-authorized OEM equipment lines, (4) your primary, authorized OEM equipment models late in their life-cycles, or (5) your primary authorized OEM equipment models still early in their life-cycles – the decision is obviously entirely up to you and based on what OEM commitments you may have in place, the profitability targets you need to achieve, and the degree of trust you have established with your aftermarket color partner.
Take the bottom-line profitability erosion estimate presented earlier as an example. With color growing to 65% of your supplies business in three years and forecasted value-per-page erosion of roughly 3% annually, your expected profitability impact would approximate a reduction of 3.45 percentage points without any cost-relief.
Assume going forward over the next three years, that you successfully convert 20% of your OEM color dependence to your aftermarket color partner and achieve an average cost savings of 25% on this converted supplies business. The impact of this measured conversion to your organization would be considerable – representing almost two full percentage points to your organization’s profitability. While these two percentage point gains don’t fully offset the estimated 3.45 point profitability erosion driven by increased price pressure in color, these two points just may represent the difference between financial health and financial crisis.
As the aftermarket continues to quickly evolve to meet color’s technological challenges and overcome end-user perceptions of color during this latter stage of conversion, the resulting and simple mechanism of increased competition can most certainly help leverage improved color profitability for you (depending on your specific degree of participation) and will continue to do so across the entire industry.