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Using Technology to Correct Profit Margins

9 Mar, 2004 By: Lou Slawetsky imageSource

Using Technology to Correct Profit Margins

for the good old days when dealers could place a copier and count on a highly
profitable revenue stream from the sale of service and supplies. Typically, that
stream lasted for at least three years and, in most cases, five years or more.
Our monthly Used Copier Report showed that, as recently as four years ago, the
average life of a copier for the first-time user (excluding resale into the used
market) was almost 5.25 years. Not bad for a sales effort which, by the way,
generated considerable margins from the sale of the hardware that rarely lasted
more than 30 days.

times, they are a-changin’”

Today, gross margins resulting from the sale of hardware continue to drop. Just
a few short years ago, dealers could count on 35 to 40 percent margin—more than
enough to cover the cost of sales with some left over. But, now we’re not simply
selling copiers. Systems are fully integrated and are competing directly with
printers. Unfortunately, this competition has resulted in eroding margins as
profits drop to match those normally found in the printer market. Our latest
edition of The Copier Dealer Distribution Strategies Report shows average
hardware margins headed south—now below 28 percent. That’s no longer enough to
cover the dealers’ SAG (sales, administrative and general) expenses, which we’ve
pegged at about 32 percent. In other words, was it not for the anticipated
revenue stream resulting from service and supplies, dealers would lose money on
every sale!

Remember the revenue stream we counted on—high margins for 5.25 years? Our
research shows that the average life of a digital system has declined by six
months. That’s a decrease of almost 10 percent in service and supplies revenue
resulting from the initial sale. Technology is working both for and against the
dealer. On the positive side, advances in digital technology offer a compelling
reason for decision makers to trade out their current analog systems. On the
other hand, these same decision makers are trading their analog systems sooner
than they might otherwise have done.

the sales representative is capturing new business, this shorter equipment life
works to the dealers’ advantage. Despite lower hardware margins, dealerships are
able to capture incremental revenue from aftermarket “clicks.” However, if sales
representatives are simply replacing their existing MIF (machines in field),
dealerships are actually losing money on the entire transaction. There is no
incremental revenue from the sale of supplies, since the dealership was already
selling them. Further, there is no incremental service revenue, since the
company already held that contract. And, the hardware sale did not generate
enough revenue to cover costs. The Copier Dealer Distribution Strategies Report
indicates that more than half of dealer sales replace their own equipment.
Stated another way, more than half of sales result in an outright loss in terms
of gross margins. Granted, it’s better to replace your own installed base than
to have your competitor do it for you, but that activity results in lower
profits overall.

concept of a 30 day selling cycle is all but gone. True, replacing an analog
system with a digital system of the same speed can (and should) be done within
that amount of time. But, include additional document management capabilities
such as printing, scanning and faxing, and the sales cycle is extended to 60 to
90 days or more. New decision makers become involved—decision makers with whom a
sales representative may have little or no credibility. Decisions made by
committee simply take longer. Further, the new recommendation (“let’s add
printing”) could affect more users, increasing the risks associated with a wrong
choice. Bottom line—a dealership’s cost of sales increases significantly, unless
the sales representative can increase the number of solid prospects in the

Finally, and perhaps most important, a dealership can no longer count on the
revenue stream from aftermarket service and supplies. We’ve already discussed
the fact that the life of the installed product is decreasing. Of greater
significance is the fact that the number of pages generated from copying is
decreasing at a rate of about seven percent per year. We can attribute some of
this decline to the fact that much of the information used by customers never
leaves its native electronic format. It begins its life as an electronic file,
is shared electronically, may be processed electronically and, finally, is
archived in that same format. However, we can attribute most of the decrease in
copy volume to the fact that users are printing more and copying less. If a
dealer is not capturing that print volume at the same rate as the decline in
copy pages, profits are going to take a serious hit.

Technology Turnaround

Before you head for the nearest bridge, take heart. Yes, the news is not good
for dealers who planned to continue flogging the traditional business model in
order to squeeze profits from it. However, there are significant profits to be
earned by simply taking advantage of the opportunities presented by the very
technology shift that has been the cause of the negative trends we’ve just
discussed. Simply put, dealers must stop leaving money on the table and begin
charging for services rather than giving them away in the hope of generating a
sale. Below are some ideas for generating incremental revenue and gaining
significant margins.

Controller Service—Our research indicates that fewer than 50 percent of dealers
charge more for servicing a connected MFP compared with a standalone copier of
the same model. What’s more, for those who do charge, the average surcharge is
only 12 percent. Yet, the controller adds a level of complexity, and potential
service exposure, not found in standalone systems. This is especially true in
the case of external controllers, which in reality, are standalone computer

you ever consider servicing any number of computers at no charge to the
customer? Obviously, the answer is a resounding “No.” Target a service contract
up-charge of approximately 15 percent. Alternatively, sell blocks of service
hours. To start, consider a separate service contract covering the controller.
Although this makes the up-charge easily identifiable (not necessarily a good
thing), it allows pricing to be adjusted if the amount of time service techs
devote to controller service is underestimated.

Service—Already providing support (I hope) for the connection between the MFP
and the LAN, it’s only a small step to next providing service and support for
the LAN itself. Yes, this venture will require specialized personnel, yet it
will increase your presence and credibility with the IT community and make the
sale of additional MFPs and printers much easier.

service provides a steady revenue stream to help replace the margins lost from
decreased copy volumes. However, before you leap into this arena, you should
understand that the business model is different. Whereas there are economies of
scale in the traditional service segment (the more units, the lower the average
cost of service for each) this dynamic does not exist in the LAN service sector.
Here, dealers are faced with the need to add skilled personnel as the service
base increases and at a rate faster than that experienced in the copier world.

Scanning—Here’s a dealer’s worst nightmare. A customer purchases a 50 PPM
multifunctional device, scans 30,000 pages per month and never prints or copies
a single page. An exaggeration, yes but, you get the point. Scanning volumes of
documents results in service exposure; dealers should charge for scans in those
cases where the devices “click” the scanner. Common charges are $0.0015 to
$0.002 per page. Dealers will be surprised at how quickly, even at that level,
service revenues will jump.

Driver Downloads/Training—How much time do reps spend downloading drivers and
training users at the workstation level? Many dealers have created a significant
revenue stream by simply charging for driver installation and training above a
particular number of workstations. The charges are typically $50 to $75 per
workstation (above the base number). This is significantly less than a typical
VAR would charge for the same activity.

dealers feel that charging for driver installation limits the number of
workstations and reduces potential page volume which is a valid point. However,
dealers must learn to balance the time spent in these activities against the
potential for capturing page count when you establish a price.

Application Design—Dealers selling “solutions” have often found that they are
designing special applications to address workflow in accounts receivable,
engineering, legal and other departments with unique requirements. While these
applications are often a condition of sale, dealers are faced with an ongoing
need to adjust and monitor these departments. In other words, a dealer that has
designed an accounts receivable workflow application is now seen as the accounts
receivable expert and should be entitled to charge for these activities.

what’s the bottom line? The traditional dealer business model is leaking profits
like a sieve. However, there are abundant opportunities to capture new revenues
and profit streams to take the place of those lost to technology. Be creative
and be profitable.

- - -

Lou Slawetsky brings more than 38 years of
experience in the office automation industry. He is currently President of
Industry Analysts, Inc., a senior marketing and management consulting firm
specializing in market research, focus groups, training program development and
product testing for the office automation industry. The company also publishes
The Office Products Analyst monthly newsletter based on more than 50,000 user
interviews each year. For information, visit www.IndustryAnalysts.com or e-mail
Lou at Lou@IndustryAnalysts.com.

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