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Losing Focus Part IV

15 Aug, 2002 By: Wes McArtor imageSource

Losing Focus Part IV

tried and true measurement of any dealer’s success has been and continues to
be sales revenue. This is a very important number and no dealer can afford not
to push this number as high as possible. This number has also been a key
indicator for growth or decline. Manufacturers are only concerned with the
dealer’s ability to move product, whether the product is good for the dealer
or not. Most dealers know that sales revenue is only a portion of what has to
grow for a dealer to maintain profitability and growth. The concern I would like
to put forward in this article has to do with the disturbing trend of declining
overall service revenue, despite sustained or growing sales revenue.

now, every dealer should be aware of what percentage of their sales are being
made to their existing customers, replacing existing equipment. This percentage
should be compared to those sales made to new customers, who have never owned
equipment of yours before. In many of the established dealers I have visited,
this percentage is 60 percent or more to existing, and 40 percent or less for
new business. In dealers who have been in business less than 10 years, the trend
is the reverse.

asking about the overall financial health of the dealer, the younger companies
are experiencing substantial growth and solid profits, while the mature dealers
are often complaining of declining profits in the face of static revenue. This
is not to say that there are not mature dealers growing and increasing in both
revenue and profit, but I have encountered a number of dealers who are suffering
with the situation I have outlined. Within this context there are ideas and
solutions all dealers can benefit from. For instance, what the difference is and
how the mature dealer can turn their situation around.

Young Dealer Profile

Most of the customers I have, who have been in business less than 10 years, have
a number of traits in common. Some of these similarities have a definite impact
on how the dealer is positioned in their market and their success in sales and
service. The most prevalent trait is that these dealers tend to be centered in
primarily digital products, but more importantly they have a proportionately
greater percentage of high volume placements. This does two things: “First,
this increases technician productivity and revenue per tech. Second, it reduces
the likelihood that sales is placing lower end less productive and less
profitable products.”

being selective in the products they choose to sell, they can control which
customers their sales are targeted for. In effect they stay better focused on
the products and where those products perform. Another less noticeable effect is
that these high-end customers tend to put a very high emphasis on service
quality and responsiveness when considering purchasing from these dealers again.
As a result, the resale percentage to these customers can be very high,
depending on service quality. This requires less of the sales department’s
time and helps keep them focused on acquiring new customers and prints. Also,
because these dealers are young, their customer base has only turned two or
three times. It is quite common for new dealers to “baby-sit” those first
generation customers because that is where they got their start, and due to this
fact, these customers often buy again because of this spoiling.

is also quite surprising to note that most of these young dealers have made the
financial commitment to infrastructure. They have purchased the latest and
greatest offerings in software and hardware to run their business. This has in
turn given them the feedback necessary to limit the effect of missteps and
allowed quicker course corrections to be made.

Mature Dealer Profile

My intent here is not to seem derogatory to the mature dealer. Many mature
dealers are the largest most successful dealers in the nation and continue to be
the guiding force for many others. In this discussion though, I’d like to
point out some of these differences and how they affect the bottom line. Some of
these distinctions will add validity to my concerns about dealers successfully
selling themselves out of business. The average mature dealers will have a field
population structured as follows:

Analog Segment One

Digital Segment Three

Analog Segment Two

Digital Segment Four

Analog Segment Three

Digital Segment Five

Analog Segment Four

Digital Segment Six

Analog Segment Five


Digital Segment One

Fax Units

Digital Segment Two

lets look at what happens as a result.”

sum of the copies generated by analog segment one and two will be less than 15
percent for the average dealer. However, the corresponding service call load
will be in excess of 38 percent. So that percentage of your service man power is
used by taking service calls on these machines.

you can see, the low end segment one and two analog copier produce a
proportionately small number of copies in relation to the service call load they
generate. Let’s talk about these customers for a moment. First let me say that
not all segment one and two customers, fall into this description. It is
accounts where you have multiple placements of higher volume machines, that
placement of some segment one and two machines is acceptable.

am primarily discussing customers who have only one product of yours, and it is
a segment one or two analog product. Let me make it clear that not all of these
customers are the problem, but I will generalize to make the point. Group these
customers as follows: take all the customers whose machines are five years old
or older, that produce less than 2500 copies per month, and have no other
product of yours. The vast majority of these customers will not buy a larger
machine on their next purchase, so the seed machine mentality is fiction. When
these customers do buy again, it is because they have to; their current machine
no longer works. Worse yet, they tend not to buy based on the quality of
service, they buy on price. Thus making all those years of providing the same
level of service as the more loyal high-end customer for naught. I recently did
this exercise for a successful dealer in the Midwest.

And Revenue

Further analysis shows that although 60 percent of this base is marginally
profitable, the 40 percent that is not, tends to eliminate most, if not all, of
the profit generated. Taking just analog segment one, this dealer generated
right at $451,000 in revenue, with labor cost and parts they spent almost
$450,000 in service expense making the net profit for the year $1,000. Profit is
profit, right? I am all for making profit, but the problem here is that the 22
percent or so of the techs labor required to get this $1000 profit, makes the
revenue and copies per tech very low. If you were to selectively eliminate the
worst accounts and the manpower required to service them, you could drastically
improve the profitability of the service department. However, for the dealer
used in this example, 50 percent gross profit on these units would only
represent $150per year. Yet again, this is not the worst part of this equation.

assume for the sake of argument, that you are very successful at maintaining and
reselling your current customer base (all segments). Let’s also assume that
you annually increase the cost of service where contractually allowed to do so.
Over the course of the 3-to-5 year life cycle, you will have seen an overall
increase in service revenue from these accounts. Now, what happens if you have a
sales department that is focused on re-selling this base, and somehow it
convinces this customer that this older analog device needs to be replaced by a
newer more reliable digital device? You have taken the exact same number of
copies and lowered the service rate, thus your revenue. This is done under the
often-erroneous assumption that the new machine costs less to service than the
one it replaced.

in general, it is fair to say that digital is more reliable than analog, you
must keep in mind that technicians have experience on these older products and
that often improves the machine performance. The new products have more
expensive parts and because of the additional bells and whistles, they tend to
have more operator error, learning curve technical calls, and often network
calls that the older analog did not. As a result, for the first year or so, the
cost per copy is actually higher. So while you have successfully kept this
customer in your base, you have not increased their copy volume, but you have
decreased the revenue they produce for your company.

long-term net effect of this example is declining service revenue and/or
profitability. You have made your vendor happy selling more of the entire
product line, but I do not believe you did yourself any favors. Many dealers are
providing high quality service to this very disloyal customer base that tends to
complain more and generate less profit than your higher end accounts, which begs
the questions: “Why are you selling them in the first place, to satisfy vendor
agreements? Do they have a vested interest in the success of your company?” Or
“Will they sign another dealer in your area at the drop of a hat?”

is my belief that the successful dealer will be very selective about which
customers it can provide quality service for, and which customers it wants to
have. You must be willing to sell hard, but also willing to walk away from deals
that will cost you money. With this in mind, also remember the saying “You
will need at times to take a loss on some business to get more business,” but
it needs to be a knowledge-based decision. Vendor major-accounts need to be
managed closely, because the margins are razor thin, and any service problems
can wipe out what little profit there is. Believe me when I tell you, most
vendors do not know what the real world cost of servicing a machine will be. So
you must!

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