Margin Makers

If you sell computer hardware, here are two words that could make you reach for the Tums: "profit margin."

Intel and AMD have been waging price wars. Average selling prices for components, like memory, have been under pressure for months and months. If, for example, you're a Hewlett-Packard reseller, the list price on a standard, SMB notebook has risen by this fat amount over the past year: Zero percent.

You get the picture.

But value-added resellers are finding opportunities to deliver value to customers and find profit margins on hardware. And they are finding those opportunities on the periphery. From LCDs, to projectors for conference rooms, to network scanners, solution providers are evaluating customer needs and filling them with hardware solutions that keep everyone happy.

In interviews with a series of vendors and solution providers, a picture begins to emerge of a market in which hardware margins are shifting to wide-ranging portions of the network where infrastructure is being updated for the first time in several years. Small and midsize businesses are now taking part in peripheral upgrades that were once exclusive to Fortune 500 engineering shops, marketing agencies and large data centers.

Some manufacturers are using channel hardware profit margins themselves as a weapon to win market share from competitors. Oki Data Americas, for example, is in the midst of rolling out a new channel program called ProfitOps. The Mount Laurel, N.J.-based printer manufacturer provides hardware margins of as much as 12 percent—sometimes more—on printers that are actually priced for small or midmarket customers. In fact, delivering profit margins to solution providers which, in turn, deliver value, was so important they decided to put "Profit" into the name of the program.

"[Average selling prices] are falling; manufacturers are taking more and more of the big accounts direct," said Candice Dobra, vice president of product marketing at Oki Data Americas. "We're really trying to address this problem of margin compression."

In peripherals, there is no single rule for estimating how a margin may shape up. Whether talking about printers, add-on storage, projectors or scanners, for example, a reseller's profit margin can range between 3 percent and 30 percent per sale depending on unit volumes, vendor incentives, software integration and service contracts. And value added to each sale can range from simple out-of-the-box setup to, in the case of digital signage or data center power management, incredibly complex architecture and months of planning.

Some manufacturers provide margin opportunities to the channel up front, in the form of discounts. Some provide them on the back end, after volume quotas are met. If there is a common theme, it's this: Solution providers are eager to provide value to their customers, and they are growing ever-more-careful to make sure they don't sacrifice profit in the process. And vendors are catching on.

Here is a rundown on margin opportunities in six different areas of peripherals, including products, vendors and programs:

Next: Projectors

Projectors
Kevin Baylor, owner of Aequus IT, a Bradenton, Fla.-based solution provider, said he has found some margin opportunities in the projector space even though his company focuses on services, not hardware. Success comes with engaging the customer.

"We have multiple conversations, try to create road maps for how technology fits in with their user needs," Baylor said. "If I see they have a conference room, I'll ask what's their need for a projector. Especially larger clients, we'll see they have multiple conference rooms and they're looking for projectors." Baylor said his company provides Canon or Dell projectors and the devices will add value to an overall project.

"We've re-energized our projector [total addressable market]," said Jeff Volpe, vice president of marketing at ViewSonic Americas, Walnut, Calif. "We can walk in [to a customer account] with a VAR, or they can walk in on behalf of ViewSonic. They can see a small conference room, and they can see an opportunity to add value with a 4,500-lumen projector," Volpe said. Earlier this year, ViewSonic introduced an iPod-compatible projector that has reinvigorated that part of its business. ViewSonic has multiple touch points with solution providers, with growing and profitable display and TV businesses. The company also offers rebates and technical support in those segments.

Other projector makers, like pure player InFocus, Wilsonville, Ore., are introducing mobile projectors in an effort to cash in—with solution providers—on the opportunities of delivering value to an increasingly mobile workforce. Company executives believe the mobile projector segment is capable of maintaining 4-digit average selling prices with healthy product margins.

Next: Displays

Displays
Although margins in the higher-end LCD space continue to shrink and fight downward pressure, the news isn't all bad. Higher-end and larger displays—once mainly located in higher-end engineering or design shops at large enterprises—are now affordable to small and midsize businesses. That opens up the technology to a broader customer set and, at the same time, allows solution providers to deliver a more potent solution.

"The 22-inch is close in price now to even the 19-inch," said Rob Kalman, vice president of U.S. marketing at distributor SED International, Tucker, Ga. Kalman said Acer, San Jose, Calif., has been adept at moving first on price cuts to the channel, allowing VARs to engage customers quickly with lower-priced but higher-performing LCDs. "Acer is very quick to be at the right price when components drop," Kalman said.

Mary Meeker, president of MEM Systems, a Bonsall, Calif., solution provider and partner of NEC Display Solutions of America, said the best way to push margin up from single digits is to use LCDs as part of a broader signage solution—one that includes software, servers and services. "With the display devices, they have gotten so short on margins I'm lucky to get 5 [percent] to 10 percent margin," Meeker said. "But we then take that particular [LCD or plasma] product, take the computer items that deliver a digital signage solution, and the peripherals end up contributing to a bigger margin," she said. "Sometimes you can take that margin from 8 [percent] on the average, and you can lift it to probably 25 percent or 30 percent margin."

Next: Printers

Printers
Among Oki Data products that VARs can deliver to enterprises of all sizes is its C8800 series desktop tabloid printer. It's priced at $2,399, prints 11 x 17-inch sheets of paper, and, for solution providers in the ProfitOps program, offers 12 points of discount up front and the potential for other incentives. "We're educating [VARs on] how to make money," said Jackie Paralis, Oki Data's senior marketing manager for channel development.

Among other printer vendors with new products or programs that they believe will be a target-rich opportunity for margins: Lexmark International, Lexington, Ky., which released the Legal Partner multifunction printer, an all-in-one, 50-ppm unit with functions like "Scan to Court" for lawyers to keep within guidelines of most courts that accept digital files; and Stamford, Conn.-based Xerox, with a series of multifunction printers including the WorkCentre 7328.

Konica Minolta, Ramsey, N.J., is talking up potential future releases including the bizhub C30P/C30PX, and several software solutions that integrate with its hardware including DocRecord, an SMB document management and archiving solution. Steve Jones, executive vice president for dealer sales, said combining the company's hardware solutions with its software solution stack can provide an offering that gives solution providers margins of 35 percent to 50 percent, depending on the size and configuration of the deal.

Another important aspect is the attached sales of ink, toner and paper—the lucrative, but often elusive, supplies business. Karla Metzler, president of Computer Color Graphix, an Irving, Texas-based solution provider, said Xerox has begun to strengthen this part of the business through its PagePack initiative, a fixed-price, monthly program solution providers can sell to their customers that provides automatic delivery of supplies to the end user each month. "It eliminates the reseller constantly having to battle [customers] shopping around elsewhere for a supplier, either on the Web or at the next dealer. It allows you to wrap it all up and tailor it to the customer. You can make about 20 points on the service and supply offering, and you don't have to warehouse the product," Metzler said.

Next: Scanners

Scanners

Stand-alone scanners, like almost everything else in IT, have seen vast improvements in performance and functionality. And as with other peripherals, margin opportunity is like automobile mileage: It can and does vary.

Take Visioneer, for example. The Pleasanton, Calif., manufacturer of scanners offers a variety of medium-priced, sheet-fed document scanners targeted at small or midsize businesses or workgroups. While a typical margin on a $1,000, 33-ppm scanner might be 3 percent or 5 percent, Visioneer recently instituted a Volume Incentive Rebate for its Elite VARs that provides 3 percent rebates for VARs that sell between $12,500 and $24,999 worth of eligible Visioneer products in a quarter; 4 percent for between $25,000 and $49,999; 5 percent for between $50,000 and $99,000; and 7 percent for $100,000 or more per quarter. The company also adds MDFs after the first year for VARs that sell $25,000 worth of eligible products.

Beyond the box, the company also packages Kofax VRS 4.1 software in with some units, which offers an extra opportunity to add document and workflow training into the hardware sale. Bill Kouzi, Visioneer's vice president of sales and service for the Americas, said VARs have the chance to extend their earnings by selling warranties as well.

Kodak, which began working with partners about 18 months ago with the introduction of its ScanStation 100 network scanning device, has mapped out a strategy for helping solution providers grow their profit margin, said Don McMahan, general manager and vice president of sales for Kodak's digital imaging organization in North America.

"We put some back-end dollars to these guys that really help them with margin; it has helped them to see a 25 percent better margin," McMahan said. Kodak, Rochester, N.Y., also recently rolled out deal registration for solution providers, which has helped stabilize margins in competitive situations. And, in August, it launched a higher-end solution—the Kodak s1740 Capture System—which scans, sorts and analyzes different document types in high-volume environments.

"It absolutely requires professional services," McMahan said. The solutions themselves, including hardware and software, are street-priced at between $68,500 to $93,400.

That makes it more than a routine peripherals sale, and it is largely targeted at institutions like banks that need to scan, sort and analyze detailed documents such as checks.

Next: UPS and Cooling

UPS And Cooling

As with other peripherals, solution providers find that there are two ways to increase margins for uninterruptible power supply (UPS) and other power and cooling peripherals: Add services and grow volume.

"We know that if we do the work, and if we register the project, we can probably make about 10 points on the deal," said Paul Robinson, network sales manager at Carlyle, a Seattle-based solution provider that resells American Power Conversion products including its InfraStruXure lineup. "So the question is, is 10 points good? If it's 10 points on a $50,000 job it's not that good. If it's 10 points on a $250,000 job, it's better."

Over the past two years, APC, West Kingston, R.I., has rolled out additional functionality and encouraged solution providers to take a holistic approach to data center design when including peripherals like UPS boxes as a way to increase value to the customer and margin opportunity for the VAR.

"On the one hand, our [average selling price] on InfraStruXure has gone up over 35 percent over the last two to three years," said Rob McKernan, APC's channel vice president. "We are taking a solution and a set of products and, continually, adding products to that solution set.

"The major story [solution providers] are seeing is they can make more money off this," McKernan said. "It's not taking years and years to get certified. There's such a strong demand today for power protection and cooling of data centers."

Tripp Lite, MGE and Liebert have also spent time focusing on power and data center efficiency and management as an end-to-end solution. To get there, these vendors are increasingly talking about the whole margin of a project as being greater than the sum of piece-part margins.

"You're not selling it individually; you're attaching it with some bigger spend," said Jonas Lehman, director of vendor programs at JDMI, a Chicago-based solution provider.

Tripp Lite, Chicago, is getting set to launch the SU80000RT4u Hot-Swappable Modular UPS system, a spokeswoman said. The device will have a bypass switch that will allow solution providers or IT managers to replace a battery without shutting a system down. The company believes the system's 4U size will allow it to integrate well in small closets or data centers where VoIP servers or other critical hardware is running.

Add-On Storage

Dave Mohyla, president of DTI Data Recovery, a South Pasadena, Fla.-based solution provider, said that both Seagate Technology and Western Digital have worked hard to create opportunities for solution providers to drive added value to even basic desktop, add-on storage solutions.

"Western Digital does try to [add value opportunities] as much as they possibly can," Mohyla said. "Seagate is taking a lot on themselves. They are packaging a lot of different VAR opportunities with their label on it. Both companies are very much in tune with working with the VARs to try to package their storage, or add value to their storage."

Perhaps as much as any segment, add-on storage has seen erosion in average selling prices as capacities have skyrocketed.

For its part, Western Digital, Lake Forest, Calif., provides add-on storage in different segments but is drawing attention with the launch of its 2-Tbyte MyBook products for Windows and Macintosh systems. The list price is $799—lower even still when you consider 2 Tbytes was, not that long ago, considered supercomputer-like capacity. Seagate, Scotts Valley, Calif., recently added a 750-Gbyte desktop storage product, FreeAgent Pro which, among other things, provides remote access and a five-year warranty. It sells on the street for $230 to $300. But the list and street prices only tell part of the story, Mohyla said.

"What I see is people are looking for redundancy. They're looking for something that would be a basic backup, and they'll pay for that type of solution with redundancy built in," Mohyla explained. With solutions added onto the basic hardware, he said, double-digit profit margin is absolutely possible.

Sandisk also has stepped up by providing APIs and SDKs to other manufacturers as well as solution providers, Mohyla said, so basic hardware can be fine-tuned for different applications or functions. The math does, in fact, work both ways when factoring value-added offerings and profit margins, he added.

"You also have to take into account, 'How are we going to get return on investment? How long will [the solution] last after we've coded our software?' " Mohyla said. "You absolutely can bring a basic storage device well into double-digit [margins], but you also have to take into consideration the cost of application development and solution development."