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What Happened to Digital Profits

15 Feb, 2005 By: Lou Slawetsky imageSource

What Happened to Digital Profits

The advent of digital integrated
imaging systems (copy/ print/ scan/ fax) was, at least in theory, a boon to both
users and dealers alike. For users, the technology promised:

  • Multiple functions on a
    single system, allowing for asset consolidation
  • Seamless integration with
    the LAN (Local Area Network)
  • Virtually unlimited sharing
    of information, bringing with it new levels of collaboration among distant
  • Lower cost of operations,
    including both output per page service and acquisition costs

For dealers, the technology

  • Lower service costs
  • Higher margins for hardware
    and service
  • Expanded influence within
    the enterprise
  • Higher levels of contact
  • Above all, more profit from
    each sale

Has the technology delivered on
these promises? The answer isn’t so clear. For users, the technology offers many
of the tools needed to consolidate assets by combining distinct functions. New
systems are fully connectable to the LAN and some workflow applications are
improved with new methods for sharing information.

But, and there’s always a "but,"
the potential of digital technology may be increasing faster than the ability of
enterprises to incorporate it into their document strategies.  Integration
remains less than seamless in many cases as IT managers struggle to provide the
increased support required.

Have dealers fared better? The
jury is still out on this issue as well. Yes, the fact that integrated imaging
systems influence more than just copying means that your sales representatives
interact with a wider range of decision makers. And, if correctly positioned
within the account, your sales reps will be dealing with higher levels of
contact, making competitive infiltration more difficult.

What about profits? Digital
technology promised higher levels of reliability leading to lower service costs.
This, in turn, was to increase service margins—the engine that drives overall
dealer profits. 

It’s true that overall
reliability has increased. For example, digital systems have eliminated the need
for mechanical sorters and scan once technology has increased the reliability of
document feeders, since these devices now cycle only once per job rather than
for every set. A review of your service records for older analog systems will
tell you that these two dynamics alone accounted for more than 35 percent of
overall service costs on many systems. Couple that with the replacement of the
mechanical process with advanced electronics and your service margins should
show significant increases.

Yet, a comparison of analog and
digital service margins, as published in the Industry Analysts, Inc. Imaging
Dealer Distribution Strategies for 2004 report, tells a different story. In
every category, hardware, service and supplies, margins are lower for digital
systems. What gives?

First, we should note that the
difference in analog and digital margins for hardware is relatively small. In
general, we feel that this is driven by the increasingly competitive landscape.
Even in the days of purely analog systems, we noted a steady decline in hardware
margins as competitive pressures increased.

We can attribute this decline to
the increased use of all-inclusive cost-per-page service contracts. Our research
indicates that 71.2 percent of dealers now offer a cost-per-page contract that
includes hardware, service and supplies. For these dealers, the all-inclusive
contract accounts for 40.3 percent of placements. Supply costs are locked into
these contracts for the dealer. As page coverage increases, a particular problem
for full color systems, the margins for supplies, toner in particular, are

But we found the most
significant decrease in the area of service margins. When we compared these
margins for analog and digital systems, we found that they have decreased by
more than 6 percent in relative terms. We have found this disparity between
analog and digital service margins in every study we have conducted. This
difference is particularly perplexing in light of the fact that digital systems
are purported to be more reliable, resulting in lower service costs. What’s
going on?

Dealers are earning less when
servicing connected systems than when servicing the same speed systems in a
standalone configuration. There are some disturbing trends that we feel are
driving this difference. First, our research indicates that dealers are pricing
service contracts for digital imaging systems at rates that are lower than those
charged for analog systems in the same speed range. That means less revenue per

Our Imaging Dealer Distribution
Strategies 2004 report indicates that 64.8 percent of dealers differentiate
their service contract prices for analog and digital systems in the same speed
range. Of these, 85.1 percent charge less for digital service. The average
decrease in price is 17.5 percent. Our research indicates that only 35.4 percent
of dealers charge more for servicing a connected system than for a standalone
system of the same speed. Furthermore, the average up charge for these dealers
is only 11.1 percent. That means most dealers are performing these incremental
tasks at no charge. Even those charging more are shortchanging themselves by
limiting the up charge to roughly half of what it needs to be in order to
maintain service profitability.

Dealers indicate competitive
pressures as the reason they do not charge for these activities. No one, it
appears, wants to be first to increase prices. Yet, your cost is increasing
dramatically because of incremental activities including:

  • Connection to the LAN
  • Assignment of user rights
  • Downloading drivers (print
    and scan) to workstations
  • Setting properties at
  • Testing and configuring
    individual applications

Of course, you’ll be asked to
maintain operability of your systems on the LAN throughout the product life.
This might even include the addition of new applications.  The problem becomes
even more severe when you consider the fact that you’ll be using your most
expensive service resources—highly trained technicians or systems engineers—to
address these problems.

Despite competitive pressures,
you simply cannot ignore the increased cost of servicing connected systems if
you are to maintain profitability in the most important component of your
business model. One method for accomplishing this is to simply change the way
you write your service contracts.

Set a price for basic service
(hardware "break and fix" only). This is similar to the contracts you’re
currently writing. Add services on an "a la carte" basis. These should be
specifically stated in the contract, allowing your customer to opt in or out at
their option. Larger accounts with IT infrastructures will opt out since they
generally prefer that outside service organizations do not interface with their
LAN in any way. Smaller organizations with no such infrastructure will welcome
the service and appreciate knowing in advance how much it will cost. Charge for
these additional services on a hourly or per incident basis. Many dealers have
successfully implemented coupon books that discount the hourly rate if purchased
and paid for in advance.

Reorganize your service dispatch
desk so that operators can differentiate between hardware and LAN support
issues. They should divert the latter to a help desk that might be able to solve
the problem via telephone, thereby eliminating the need for an outbound service
call. This process also helps you assign the service call to the appropriate
cost center.

Regardless of the method you use
to increment your service revenues for installations connected to the LAN,
increase you must. Delay this strategy and you’ll forgo the potential of
increased profits offered by today’s digital technology.

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