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Cost Per Page Contracts: The Advantages and Disadvantages

13 Nov, 2005 By: Lou Slawetsky imageSource

Cost Per Page Contracts: The Advantages and Disadvantages

If the questions harvested from
my website are any indication, the continued practice of presenting customers
with an all-inclusive cost per page contract is rising to the top of dealers’
radar screens. I have been bombarded with questions such as: are these contracts
a good thing and are there risks?

Before answering those questions, let’s begin with a brief history lesson. In
the old analog days, when these contracts used to be called “cost per copy”
plans, they were intended as a method for the dealer to lock in service and
supplies over the life of the system. Financing for the copier itself was a
separate transaction that was typically handled via outright purchase.

As the market became more competitive and dealer transactions became more
complex, purchasers sought an easier acquisition alternative. That’s how the
“all in” cost per page agreement was born. Or was it?

Actually, the concept dates back to the days of coated paper copiers. A typical
price plan stated that, “I’ll give you the copier as long as you buy the paper
and toner from me.” Those of you old enough to remember those days will recall
that there was so much profit in the paper that one could easily afford to
follow this strategy.

The advent of plain paper copiers in the early 70s (Xerox aside) changed the
dynamics of this business model considerably. The profit was no longer in the
paper. Hardware, service and supplies each had to contribute to the overall
profitability of the selling organization.

As competition for plain paper copiers increased, the hardware margins for these
products dropped like a rock. Where it was not uncommon to find gross margins of
50 percent or more, we now find them at a level consistently below 30 percent.

This year’s Imaging Products Dealer Distribution Strategies Report,
published annually by Industry Analysts (www.IndustryAnalysts.com), shows an
average gross margin for copier-related products at 29.5 percent. This trend
makes it even more essential that service and supplies revenues are maintained.
The same report shows service margins of 43.6 percent and supply margins of 36.6

What better way to ensure service and supply revenues at higher margins than to
bundle everything—hardware, service and supplies—into one contract where the
customer is charged based upon the number of pages generated each month? And,
so, the cost per page contract returned.

Now service contracts include not only all copies and prints generated by the
MFPs installed by the dealer, but standalone printer volume as well. The trend
began with printers installed by the dealer. It expanded to include all printers
on the network.

The steps to calculating all-inclusive cost per page contracts for MFPs
are deceptively simple:

1. Estimate the monthly volume that will be produced.

2. Add the cost of hardware to service and supplies required to support that

3. Divide the total cost by the anticipated volume.

There are significant advantages to these plans for both customers and
dealers alike. Of course, there are disadvantages as well. Let’s begin by
examining some of the advantages:

For the customer…

• Most workgroup imaging systems are financed through a lease due to customers’
fears that the technology will become obsolete. A lease, with its fixed payments
and no obligation to purchase, is the ideal foundation for a cost per page plan.

• Cost per page plans make all costs variable. Produce more prints and your
overall costs increase. Make fewer prints and your costs could drop, depending
on how the contract was written.

• Cost per page plans make it easier for customers to compare prices because
there is only one price.

• Cost per page plans offer maximum flexibility, often allowing for upgrading,
adding or deleting equipment during the course of the agreement. This is
particularly significant when dealers combine all pages of the enterprise into
one contract.

For the dealer…

• Cost per page plans simplify the sales process since the sales representative
has only to focus on a single price.

• Since the hardware price is included and amortized over the number of pages
generated, dealers can potentially increase their margins. In fact, some
transactions actually include a hardware cost allocation that is more than the
list price for the equipment.

• Obviously, service and supply revenues are locked in over the term of the
contract. This is particularly important in the case of supply revenue, which
can otherwise be captured by outside sources.

• The fact that cost per page contracts can be expanded to include all imaging
systems in the enterprise—MFPs, printers, and facsimile systems—presents an
opportunity for incremental service and supply revenue for systems not
originally sold by the dealer.

However, there are risks, some of which are considerable, associated with
a cost per page agreement:

• When comparing proposals, your prospects need to look at only one number. That
increases competitive pressures.

• The success of any cost per page contract strategy is largely dependent upon
the dealer’s ability to collect “real time” meter reads. Manual, labor-intensive
systems are prone to error, rarely current, lead to invoicing disputes, and eat
into the profits from your “clicks.”

There are systems available, some through your vendors and some through third
party suppliers, such as OMD (www.omdcorp.com), Equitrac (www.equitrac.com),
LaCrosse (www.lacrossesoftware.com), and EFI (www.efi.com), that supply the
essential meter reads without the need to call or fax each of your customers
every month.

• Predicting page volume can be problematic. How will you handle overages? Will
you renew the entire contract or charge on a “per click” basis for the remainder
of the month/year?

• The cost of toner represents a significant portion of dealer cost in these
contracts. Yet, this is the element over which dealers have the least control.
It would be easy if the amount of toner used were the same for every page, but
we digitized the process, allowing for downloading of Internet images. We also
added color to the mix.

Now you have to ask yourself, “Do the rewards outweigh the risks?”

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