On the hunt for higher margins

Believe it or not, there once was a time when anything associated with computers or high tech automatically came with margins that would have made even a profit-loving Ferengi smile (Ferengi, for non-Star Trek fans, are a race of beings known for their large ears and even larger desire for profit).

Those times, alas, are no more. But, says Carmi Levy, senior vice-president, strategic consulting, at Thornhill, Ont.-based AR Communications Inc., there are still islands of products that can fatten the bottom line.

“The name of the game for dealers is focusing on higher-margin items that move quickly, don’t occupy large volumes of shelf space and are relatively immune to margin erosion,” he says. “A number of areas still hold ample potential for dealers to explore – and enjoy – more lucrative revenue generation opportunities.”

Desktop and laptop computers are not numbered among those areas for Shawn Aghdassi, operations manager at Toronto-based Intellect Computer Source (ICS). He does supply them to his customers as part of his overall service (he says it’s part of the job), but margins are minuscule. “On a $1,000 laptop, we only make $60 or $70,” he says. “It’s a very competitive market. It’s hard to make money on desktops and laptops these days.”

Servers, on the other hand, provide higher margins thanks to the associated services, Aghdassi says. Customers not only want the box, they want hardware and software installation and implementation assistance. That can in turn often lead to ongoing service relationships.

Even with low margin products, extended warranties can boost the overall bottom line, Levy notes. OEM warranties on mainline equipment such as laptop and desktop computers typically range between 12 and 24 months, far short of their projected life cycle. Dealers can either partner with third-party warranty firms or build their own core competency to provide after-warranty hardware service.

“These continue to represent major opportunities for margin enhancement on products that barely return a profit,” he says. “It provides additional opportunity to build an ongoing trust relationship with clients that can in turn drive future business in a much more holistic manner.”

Where the margins are – and aren’t

While computers themselves may not bring in the dollars, some peripherals can. Especially when they, too, are combined with services. While lower-end units may only generate a $10 profit on a $110 device, higher-end printers aren’t as commoditized and so are more profitable, even before vendor programs.

These programs can increase margins even more (and increase customer loyalty) by adding additional services or consumables to the deal. For example, Lexmark partners can increase their margins by selling bundles that add an extended warranty and multiple years of toner to the purchase of a workgroup laser printer.

By bundling online ordering with seamless fulfillment and on-site services, Levy says dealers can provide the kind of full-service bundling that a purchase-only store can’t.

“Cartridges for laser and ink jet printers are relatively small, carry higher margins than the printers that require them, and represent the holy grail for dealers in search of consistent revenue streams: repeat business,” says Levy. “It also opens the door for expansion into other services that less service-focused sellers simply can’t match.”

However, notes Aghdassi, consumables themselves don’t necessarily increase margins because of competition from retailers like Staples that can afford to cut prices to the bone.

“Toner is still very competitive, but it’s steady,” he says. “Customers we deal with always buy toner from us. Because it’s steady, every month we get income from it.”

Integrated communications is a big area, according to Lora Gernon, director of the partner group at Microsoft Canada. “Customers recognize the value of empowering mobile workers, whether they’re engineers on an oil rig or salespeople on the road,” she says. Many of the empowering devices offer better margins than a garden-variety laptop and, said Gernon, “partners are jumping on the opportunity.”

Find margins riding the lifecycle wave
Of course, observes Ray Gonsalves, director of product management for Tech Data Canada, since standard “big brand” PDAs have long since gone mainstream, the margin opportunities rest mainly with niche products and less known brands. “It’s a question of how much effort the reseller wants to put in,” he says “(Selling off brands) is not the path of least resistance. The margins are better, but it’s more work to sell them.” And, he adds, as products move into retail, their sale is strictly fulfillment.Aghdassi agrees. The PDAs he sells are higher-end, specialized units, not models typically available at retail. “We’re a Symbol authorized dealer,” he says, “and that provides very good margins for us.”

Specialization is important adds Levy, saying dealers should avoid trying to be all things to all people. Instead of carrying a full line of a given product category, they should limit their offerings to the vendors and/or products that return acceptable margins. They must also constantly evaluate their product offerings, and must be ready to remove products or categories as they become commoditized.

“The overriding goal is to avoid becoming a me-too dealer whose offerings are purchased solely on the basis of price,” says Levy.

According to IDC Canada’s Senior Executive Survey, governance, risk management and compliance (GRC) is also a growing field, thanks to legislation such as Sarbanes-Oxley, Bill 198 and Personal Information Protection and Electronic Documents Act (PIPEDA). With that growth comes the need for consultants, advisory services, and systems integrators to act as trusted advisors to companies in the throes of implementing solutions.

Tech Data’s Gonsalves also sees potential in physical security, specifically surveillance. “We’re now seeing it ported to digital media,” he notes. “It plays into the trend of converged technology, and opens opportunities for IT resellers to sell into the area.” There’s also an opportunity for mutually lucrative partnerships with traditional security vendors, who need to learn the new technology to survive.

Emerging technologies are also a fertile ground for sprouting higher than average margins, according to Gonsalves. The product adoption cycle for a very new technology typically begins with the manufacturer leading the push on a direct basis. The product is, at the time, difficult to install and faces customer resistance, since they’d be taking a potentially major risk by adopting it. Margins are huge, but so are sales costs.

From there, he said, the manufacturer involves technical VARs, who sell to early adopters – again, with higher margins. “And,” he concludes, “if you take the cycle naturally, once early adopters have seen a competitive advantage (from the new technology), there is a rush from others to catch up. Then the mass market comes into play, we see alternatives emerging and will often see one big brand (the 800 lb gorilla); typically then margins fall.”

Two key ‘S’ words: solutions and services
“Some market niches are less price sensitive than others,” adds Levy. “Accessories buyers are often willing to pay top dollar for leading-edge hardware, and are willing to do so without a significant amount of up-front research or business case justification.”ICS’ Aghdassi agrees margins on accessories are higher in general although, he says, it does vary. Memory and hard drives aren’t money makers for ICS.

“We probably make better margins on bags, but they don’t cost that much,” he says. “We get much better margins on headsets, and on higher end keyboards and mice.”

Service and support, however, can be moneymakers, says Ricky Mak, associate analyst with IDC Canada. Of hardware, software and services, Mak says services usually yield the highest margins of the three.

“Resellers have generally realized the perils in working with a hardware-centric business model, and have included software and services to offset low margin hardware items,” says Mak.

It’s a model that has worked well for ICS, says Aghdassi, and Levy adds that despite the widespread availability of support resources via the Internet, enterprise end-users continue to exhibit reluctance to go online and search for themselves.

“They have better things to do with their time than troll support forums and provide support for themselves and their colleagues,” says Levy. “Dealers can easily offer these services.”

Building solutions can also augment the bottom line. Gonsalves recommends resellers take common products and wrap them around a business solution.

“The sum of the parts is a greater value,” he says.

There are so many ways to attempt to eke out happier margins but Mak offers a solid starting point:software+services.

“The next step would be to identify which software and services best complement the reseller’s existing business model,” says Mak. “Resellers searching for clues as to which types of products have higher margins should look into partner-to-partner network forums and blogs for insight.”

Levy adds savvy dealers can build services-focused competencies that larger players can’t or won’t replicate.

“In these cases, their relatively small size will be an asset as value-seeking customers increasingly hook up with dealers who are willing and able to take the time to build lasting and value-added relationships,” he says.

The kind of relationships that would make a Ferengi smile.

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Jim Love, Chief Content Officer, IT World Canada

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Lynn Greiner
Lynn Greiner
Lynn Greiner has been interpreting tech for businesses for over 20 years and has worked in the industry as well as writing about it, giving her a unique perspective into the issues companies face. She has both IT credentials and a business degree

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