I can vouch for this gasp as I was indeed there moderating a panel on managed services and recurring revenue. When Jay McArdle, a panelist and executive from Normal, Ill.-based Zdi, declared to the room he was proudly taking margin out of the hardware sale in order to create more opportunity to sell service, I too took pause.
Little surprises me anymore, but when I hear a commercial integrator who is pridefully taking the margin out of product even I was shocked.
I disagreed then with his words and I disagree now.
However, before I proceed to share why I disagree, I do want to say that deep down I do see where McArdle and his organization are going with this diminishing margin philosophy. They see the trend of diminishing margin and they are taking a proactive approach.
For that reason I commend them.
However, I think the idea that selling service successfully has a distinct interdependence to hardware pricing is a misnomer.
The lynchpin? Value!
The reason margins were stripped out of much of the IT product portfolio and now the same thing is happening to the AV portfolio is a direct testament to value creation.
When the products and services we were selling no longer required our experience and knowledge to sell them, we were bound to see our margins erode. This, coupled with many consumer “type” electronics coming down in price (projectors, flat panels), was a perfect storm for lower margins, both gross and as a percentage of revenue.
However, the secret sauce is in the specialty knowledge we bring as system integrators: the ability to take all the pieces of the puzzle and put them together in a way that helps customers run better businesses. Companies pay premiums for products and services every day that solve problems for them.
One of the keys McArdle mentioned was their transparency around pricing. More or less, they disclose fully what they are selling items for. I think this is fair because people can always find items online and usually for less than an integrator can buy them.
His comments were that because of this information availability, they have to make sure they sell for low prices so their customers don’t feel they overpriced an item.
Here are my thoughts on this…
Let’s try transparency in another light. Let’s tell our customers there is immense value in what we do in “totality” and how our pricing reflects a company that brings unique skills, capabilities and solutions to clients. This is worth paying for and worthy of margin. Collectively, meaning for both products and services.
My last thought on this…
There may be some that think, ‘Hey, the cell phone companies give away phones’ or ‘SaaS companies give away hardware.’ Both of these examples are true, but remember, the services they are selling are not services that have a direct corresponding labor cost at even near the cost of a technician or installer. These types of giveaways generally include multi-year contracts and multiple triple digit percent margin.
In commercial integration selling your hardware for seven percent over cost so you can make 40 or 50 percent on labor makes for a tough sled when it comes to cash flow and resource management because you can only bill for the physical labor you have, which requires substantial cost with each additional resource and impeccable planning for business ebbs and flows (seasonality).
So cool concept and provocative thinking Zdi, but I challenge you that by focusing on value and a new breed of transparency, you can make money on both hardware and services.