What the Manufacturer Is
When talking to dealers and attending trade shows, I often hear the manufacturer referred to as their partner. Manufacturers love to position themselves as the dealer’s partner. We are going to discuss the relationship between you and the manufacturer.
Not Your Partner or Friend
When you think about a partnership, typically you think about a mutually beneficial arrangement where both parties are concerned about the well-being and success of the other. This would be a true partnership.
In the same manner, a true friend would want what is best for you. A friend would not be solely concerned with how they benefit from the relationship.
Your Vendor
The manufacturer is interested in selling you product. They have a factory, and they sell what the factory produces. They sell this to you whether you need it or want it. They have a warehouse that they want to empty into your warehouse.
If they make an effort to help you sell, it is solely because they can move more products. If you make quota, they will raise the quota. They are not interested in helping you sell the device that best suits the customer’s needs unless that is what they have in inventory.
Why it Matters
Why is that information important? Because remembering they are your vendor will enable you to view what they tell you with more skepticism. This skepticism will help you filter what the sales rep wants to sell to what will make you the most money.
The rest of this discussion will highlight the need to not worry about pleasing your vendor but worry about making choices that benefit your company. Making the right choices may strain the relationship, but the result will be worth it.
Focus on Making Your Business Profitable
There are several pieces to the puzzle when it comes to maximizing your profitability. We will discuss the following 4:
Sell the Right Product
This is the biggest issue in our industry today. Dealers consistently oversell equipment. They do so because the vendor pushes them in that direction. The result is that 60% to 70% of the equipment installed in the field is in an environment where it doesn’t perform well.
Overselling equipment results in lower profitability and lower customer satisfaction. Most clients print on A4 paper and do not need the ability to print on A3 size paper. If they do have the need, a single A3 device would be enough to support their needs.
To facilitate sales of the larger equipment, sales reps typically want to discount the service cost of the equipment. This means putting a machine where the cost of the service is high while they are reducing the price of the service hurting the company and the service department twice.
Start leading with A4 products unless the client has specific requirements for A3 paper. Sell the lowest volume device that meets the clients expected peak volume. The sales rep will be able to preserve both equipment and service margins selling A4 devices instead of the A3 comparable device.
Sell Flat-Rate Billing
There are several names for flat-rate billing. Konica Minolta calls it One Rate. Seat-based Billing (SBB) or Imaging Device as a Service (IDaaS) are other names for the concept. No matter the label, it is a per device or per user billing program that includes service and supplies.
Flat-rate billing is the method clients prefer; it doesn’t require meter reading. It allows for simple budgeting, and cost allocation. Flat-rate billing allows you to layer multiple products into a single monthly rate. Layering multiple products and services makes it more difficult for the competition to know how you constructed the agreement, and therefore it is more difficult for the competition to upgrade the client.
Use a Rental Lease
Using a rental lease as the basis for the flat-rate billing, allows you to continue the lease indefinitely. At the end of the term of the lease, when the lease is paid in full, the equipment portion of the rental agreement turns into additional profit for the dealer.
Slow the Replacement Cycle
Once you have the proper billing mechanism and the rental type of lease, you can slow the upgrade cycle to between 5 and seven years. Paying for the equipment in the first 36 months of the lease means that for the next 2 to 4 years the amount that previously funded the equipment is now yours as profit.
Your sales department can now focus on finding new clients so that you generate organic growth and increase your customer base. Organic growth will become increasingly important as the office print output continues to decline.
The Financial Impact
For the following illustration, I am using the information provided by a dealer contact for sales and service pricing. Service costs are based on BEI information for the specific models. Supply costs are estimated. The devices proposed are both 38 PPM devices.
Equipment Sales
The chart below looks at the impact of the different sales cycles:
|
A3 sales Cycle |
A4 Sales Cycle |
A4 Flat Rate Plan |
|
|
Initial Transaction |
|||
|
Equipment price |
$ 6,900.00 |
$ 2,700.00 |
$ 2,700.00 |
|
Equipment Cost |
$ 5,600.00 |
$ 1,900.00 |
$ 1,900.00 |
|
Sales Commission |
$ 520.00 |
$ 300.00 |
$ 300.00 |
|
Profit |
$ 780.00 |
$ 500.00 |
$ 500.00 |
|
Second Transaction |
|||
|
Equipment price |
$ 6,900.00 |
$ 2,700.00 |
|
|
Equipment Cost |
$ 5,600.00 |
$ 1,900.00 |
|
|
Sales Commission |
$ 520.00 |
$ 300.00 |
|
|
Profit |
$ 780.00 |
$ 500.00 |
|
|
Net Sale Revenue |
$ 13,800.00 |
$ 5,400.00 |
$ 2,700.00 |
|
Net Sales Profit |
$ 1,560.00 |
$ 1,000.00 |
$ 500.00 |
|
Total Commission |
$ 1,040.00 |
$ 600.00 |
$ 300.00 |
Looking at this chart, it would seem that there is a significant revenue advantage to selling on a 36-month cycle selling A3 devices. But there is more involved.
Service Revenue
Service Revenue is based on dealer pricing of $.055 per copy color and .009 B/W on the A3 device. The prices for the A4 devices are $.08 color and $.014 B/W.
|
Service Revenue |
|||
|
B/W Clicks 2000/M |
$ 18.00 |
$ 28.00 |
$ 28.00 |
|
Color Clicks 2000/M |
$ 110.00 |
$ 160.00 |
$ 160.00 |
|
72 months revenue |
$ 9,216.00 |
$ 13,536.00 |
$ 13,536.00 |
Service Costs based on BEI data for the A3 device is .01879 in the 4,000 pages per month band. The same band for the A4 devices is .0223. Using the same supply cost of .02 per page results in the following:
|
Service Cost |
|||
|
Service cost |
$ 0.02 |
$ 0.02 |
$ 0.02 |
|
Supply cost |
$ 0.02 |
$ 0.02 |
$ 0.02 |
|
72 month cost |
$ 11,171.52 |
$ 12,182.40 |
$ 12,182.40 |
|
Service Profit |
$ (1,955.52) |
$ 1,353.60 |
$ 1,353.60 |
Looking at these results, we can see that the A4 devices are significantly more profitable on the service side.
Total Profit
|
Service Profit |
$ (1,955.52) |
$ 1,353.60 |
$ 1,353.60 |
|
Profit on equipment |
$ 1,560.00 |
$ 1,000.00 |
$ 500.00 |
|
Bonus revenue from lease |
$ 2,721.60 |
||
|
Total Profit |
$ (395.52) |
$ 2,353.60 |
$ 4,575.20 |
When looking at the overall profitability of the account, we see that by leasing on a 72-month cycle with flat-rate billing, the dealer almost doubled the profit on the account.
That leaves us the question of which is better for the customer? The chart below shows how the customer fares in this transaction: (Cost includes lease payment, service, and supplies)
|
Customer’s monthly cost |
$ 321.20 |
$ 263.60 |
$ 263.60 |
So, both of the A4 options are the same for the customer, both of the A4 options are better for the dealer, and the flat rate program is far and away the best choice for the dealer.
This philosophy is good for everyone except for the manufacturer. If your salesforce cannot grow your business through new customers, then your unit sales will go down, and that will affect some of the rebates and incentives, but the increase in revenue per machine will offset any loss.
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