Meet an Integrator Responsible for Driving Product Margins Down

Jay McArdle says razor-thin product margins are a good thing for Zdi, because it facilitates service sales.

Tom LeBlanc

An audible gasp swept through the audience at CI Summit 2013 when Zdi, Inc. CIO Jay McArdle said, “We intentionally erode product margins to show clients the value of our people.”

By doing so, he explained during a panel discussion on how to spur recurring revenues, it breaks down some of the opposition to purchasing service contracts and allows Zdi to talk more to clients about the value beyond products it delivers.

One audience member asked, How low is low?

“Typically, 10 percent or less,” McArdle said. He had elaborated further in a recent CI article:

“Traditional AV companies say they want to make 30, 40 points on material and my labor is not that valuable—$60 or $70 per hour.” An IT sales structure, meanwhile, “is five points, if that, on material, and maybe $150, $200 or $300 on labor. That’s where we’re going as an industry. [Traditional integrators] aren’t willing to embrace that and put more value into their people.”

During the CI Summit panel, McArdle also advocated showing clients product costs and being up front with clients about margins.

“I like the idea of transparency,” said audience member Mark Stross, CTO of ANC Sports. “It’s a good opportunity [talk about] your talent as to what makes you different.”

Panelist John Vitale, VP of products at AVI-SPL, said the folks challenging McArdle’s take on margins are looking at it backwards. Selling service at the expense of margins is “the gift that keeps on giving.”

Jay McArdle on how Zdi benefits from thin product margins:

Managed Service Sales Obstacles

The integration industry needs to get a lot better at selling services, said panel moderator Daniel Newman of Broadsuite. He pointed out that only 37 percent of integrators surveyed for CI’s 2013 State of the Industry report say their firm has more than 10 percent of its revenues under contract.

One reason, said Vitale of AVI-SPL, is integrators tend to “lead with hardware, not service.” Products, he said, should be “the secondary part of the sale, the bells and whistles.”

Manufacturers bear some responsibility for the industry’s struggle’s to migrate to a service-based business model, he added. Integrators “need to be able to call a manufacturer at 2 p.m. on a Saturday” to troubleshoot a product that’s not working. “That’s what we need to be able to push services.”

Typical integration firm sales compensation is also a barrier to selling more services, Vitale added. “Sales people are coin operated,” he quipped. “If they’re paid to sell services, they’ll sell services.” AVI-SPL has guided sales associates in that direction, he said.

So has Logic Integration, said panelist Chris Bowland who handles the firm’s commercial sales and design. “We are paying our sales people differently for service contracts,” he said. They get a “pretty hefty commission because we really want them to sell this as opposed to [the old way].”