With the UK's economic situation still close to crisis point, major IT vendors may be forced to climb the ladder of success by cutting their product prices - one way or another. Discounting may seem a popular way to boost a manufacturer's profits, but how does it affect the reseller?
It may be an impetus for resellers to impulsively reduce their own margins, believing it will be the best way of ensuring they secure a profit. But these short-term solutions can end in a price war, challenging ethics as much as it drags down revenue.
Anthony Perridge, channel director for EMEA at security vendor Sourcefire [pictured, left], says: "Price wars between resellers usually lead to some deciding to sell at a loss - this is something we as a vendor work hard to avoid.
"In my experience, encouraging resellers to squeeze their margins will lead to a lack of interest in your product and damage to the company's long-term partner relations. Nor does it help to strengthen the brand or product offering."
Vendors may apply discounts simply because they feel forced to do so. One reason may be excess inventory, such as the recent $150m (£93m) loss Acer incurred when it was forced to clear stock from the EMEA channel. As reported in CRN, this resulted in JT Wang, chief executive of the hardware vendor, voluntarily giving up his entire salary and bonus, as well as the rest of the board taking a 50 per cent pay cut.
Yet while discounting can potentially cause many problems for resellers and distributors - loss of profit, negative relationships and reseller wars - some benefits can also result. All things being equal, more competitive pricing can and should result in larger sales, when without this being implemented products would not have been sold.
James Kight, vice president of reseller Printerland, says: "These discounts can either be good or bad, and most of the time they [vendors] apply them for the right reason. In the past, manufacturers have overestimated orders, which has resulted in stock being reduced and discounts being applied. This happens less now because they may have learned from their mistakes and in turn have reduced this [practice]."
Kight [pictured, right] continues: "If I buy a printer for £500 and then it is discounted to £250, I may have to sell double to make a profit, but the discount may make it easier to sell them. I have had relatively good experiences with vendors in the past. I cannot say this has ever resulted in negative consequences."
Regarding the effect of discounting on distributors - which face some of the same problems as resellers - VIP Computers' sales director, Dave Stevinson, maintains that discounting is primarily the responsibility of manufacturers.
"As a distributor, we tend to operate on micro-thin margins, leaving little room for discounting. However, there are many other ways in which value can be added and resellers tend to look for more added value as opposed to just chipping away at the price," Stevinson says.
This may appear to be an example of vendors perhaps forcing distributors into taking a loss because they cannot allow for discounts to happen. However, there are solutions that can be applied as a way to stop these problems occurring, many of which are - however optimistically - put into practice by vendors.
Sourcefire's Perridge notes that companies may add a wraparound service that can increase revenue. And with the correct training imposed as well, this can ensure the vendor is equipped to sell a product by the best means rather than simply seeking out endless numbers of resellers.
According to Perridge, this can result in higher sales figures since resellers want to work with Sourcefire above all others because of the benefits and protection on offer, and therefore become more likely to push some products over others.
Taking the register
A deal registration scheme is another way that Sourcefire has responded, he says. This attempts to ensure that resellers are not fighting over one account and knocking each other down on price. Through such programmes, partners may register a deal and get the chance to be offered preferential margin on the sale, explains Perridge.
This means that a partner can enjoy, for example, a 20 per cent profit by registering just one product or, in a competitive sense, a 30 to 40 per cent margin by the time services have been included on the purchase.
Services in this area can span technical support, consultative offerings, and training about implementation, integration, turning and ongoing upgrades - all of which add value to the end product.
Perridge adds: "Our deal registration scheme is important to us, as is the investment in partner training to deliver these high-margin services. We hope this helps to ensure customer satisfaction rather than spark a reseller war."
Barrie Desmond, business development and marketing director at VADition, says: "A discount is the amount of margin a reseller is prepared to give up in order to secure a sale. You discount because you are in stiff competition with someone else, or if you cannot justify the value of your solution, or both.
"In a commodity market for broadline products, everyone sells much the same product, and everyone has much the same margin to play with.
"The race to the bottom ensues and is quickened by those resellers and salespeople with the greatest inability to demonstrate value to the customer. In fairness, this is also exacerbated by tighter budgetary pressures faced by increasingly cost-conscious customers."
It will always remain a vendor's prerogative to slash product prices where necessary. Meanwhile, a strong, long-term relationship with channel partners can help mitigate resulting risk.
Desmond [pictured, above left] says that the lack of control a channel player can exercise over discounting levels is one of the biggest reasons why being a market follower rather than leader is such bad business. A leader will be better versed in anticipating trends and calling on a far more differentiated and specialised portfolio of disruptive technology solutions. A leader will have wider margins to play with and less competition to face.
"Ironically, they are under less pressure to discount," concludes Desmond.
Fortunately, some vendors seem to understand this. Tracey Fielden, head of channel marketing at Canon UK, says the print vendor works with its partners on a profitable growth model that helps them create flexible pricing while still supporting development and expansion.
For example, a reseller providing a managed print service can help the customer immediately reduce costs in print per page, paper wastage and electricity consumption, while also providing substantial long-term cost savings.
Fielden [pictured, right] says this helps Canon's partners to have a flexible and value-added approach - such as identifying new revenue opportunities through specialism and cross-selling - to building their businesses.
"We do not believe discounting is a sustainable business model - it is very box-driven and encourages loyalty based on price, rather than value," she says.
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