Add-ons drive higher reseller margins

Published: September 8th, 2008

Worldwide IT spending is expected to exceed $US3.4 trillion this year, according to Gartner, up eight per cent from 2007, and hardware accounts for $US408 billion of that sum, seven per cent higher than last year. PCs account for 60 per cent of the hardware spending.

Unfortunately, those PCs are commodities with razor-thin margins, so resellers have to look elsewhere for profitable products. But where?

Peripherals and accessories – at least, some of them – can offer opportunities for high margin upsells.

“The margin picture for hardware is pretty bleak, and thus the ability to attach some of our solutions is really critical for the margin mix,” says Greg Milkovich, country manager at Belkin Canada. “When we’re speaking to the reseller community, it’s certainly about attaches.”

Since Belkin’s business is devoted to peripherals and accessories, it offers a lot of things to attach – with significant margins attached to them. Milkovich says that resellers can generally expect gross margins in excess of 50 per cent, and through Belkin’s backend program, Margin Maker, can add an extra five percent by hitting certain clip levels.

For desktop computers, he suggests that value-added items such as a surge protector or UPS are natural extensions to the sale. These work for laptops too, but portable computers offer a whole new set of opportunities as well.

“A bag is a natural piece,” he notes, “but there’s also a second a/c adapter.”

For home users, the company offers things such as a USB-powered laptop cooling pad and the Cushtop, a padded stand for lap, table or floor that has an integrated storage pocket for the mouse and power adapter. All, says Milkovich, very nice attach products that drive high margins as well.

USB printer cables are another profitable item. Milkovich says that you can usually make as much on the cable as you do on the printer itself.

CDW Canada‘s senior manager, marketing, Daniel Reio, on the other hand, doesn’t see much profit in cables. “For a standard, run of the mill USB printer cable, the margin is OK – more as a percentage than for a notebook, but less than for a complex cable,” he says. “More obscure cables such as HDMI and monitor cables tend to be more expensive and have better margins.” That, he admits, is balanced by the lower volume of the specialized cables.

He sees the best margins on a percentage basis from specialized items. For example, most laptop manufacturers offer accessories specifically designed for their products. These items – a/c adapters, docking stations, extra batteries and so forth – tend of offer significantly higher margins than their generic counterparts (if such counterparts even exist).

Server manufacturers often sell specific hard drives for their machines, says Reio, and these drives enjoy higher margins as well. However, printers tend to have similar margins whatever their price points, while add-ons such as paper trays, because they’re device-specific, sweeten the bottom line.

Carmi Levy, senior vice-president, strategic consulting at AR Communications, has, he says, “lived the reseller’s low-margin death spiral”, and recommends that resellers establish core competencies in supporting a high margin category early enough in its life cycle to allow an extended period of realizable revenue.

Projectors, for example, have moved from very expensive devices sold only to companies that could afford them to broadly available units, says Levy.

“Dealers that had already built up significant expertise were in a better position to capture the larger markets that could now afford projectors at a lower price point,” he says.

And, he went on, they could also capture the market for high-margin consumables such as bulbs.

Even as high ticket items such as flat-screen displays and laptops slip in price, Levy notes, “Accessories such as maintenance products, Bluetooth products, docks, cases and adapters are nicely maintaining their margins and present ample opportunities for dealers to build bundles of products and services.”

Reio agrees. “We train our sales force to look at entire solutions to drive higher margins on the overall sale” he says. “Trying to sell a standalone peripheral is harder than selling it as part of a solution where the customer can see everything working together.”

Bluetooth products tend to drive higher margins than other wireless products, say both Reio and Milkovich, though Reio notes that RF works so well that there may not be an inherent benefit in it to the customer. However, says Milkovich, Bluetooth does have a lot of momentum because it makes it easy for users to connect things like phones to their computers.

Other wireless products have become commoditized, says Reio, so margins are nothing special unless there is an upgrade moment such as the move from 802.11b to 802.11g. Those upgrades tend to be proprietary, so command higher margins. The move to 802.11n may also present opportunities.

“Being early in the game is important,” Levy observes. “To succeed, you need to watch carefully for shifts in demand for technology and be prepared to move quickly as sales begin to transition.”


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