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Accusation: Exchange rate excuse for tech price gouging

12 Feb 13

With allegations of tech companies engaging in price gouging emerging in Australia, a local channel executive has stepped forward to claim that similar practices are rife in New Zealand.

Speaking with Techday on condition of anonymity, the individual concerned says the problem is not confined to vendors, but resides at the distribution level.

“Vendors sells to distributors, who sell to channel partners, who sell to end users," explained our source.

"In Aussie, in many ways, the government talking to the vendor [MS, Apple etc] is only one part of the picture, as once the vendor sells to the distributor, pricing is out of their control to a large degree."

We’ll call him/her Mr. X, both because it makes the story easier to read, and because X has a suitable air of mystery about it.

Delving further into the issue, s/he says that many vendors work off a US price book, selling to distributors in US dollars.

“Distributors may or may not hedge with US funds; or, in many cases, they are [hedged] when prices are dropped, using that as an excuse to maintain higher margins and higher NZ$ prices.”

Mr X says he has put his theory to the test. “I've confirmed this first hand by getting a quote for the same product within the same week or two, when I know the exchange rate hasn't changed, and I get different pricing.

"And I've confirmed this on different occasions, when the price has changed, and suddenly they say that they didn't hedge this time around; basically, you rarely get an answer that matches what pricing you are actually seeing.”

In other words, the pricing always tends to be in favour of the distributor, irrespective of what the exchange rate is really doing.

The other area in which Mr. X believes Kiwi tech buyers are getting ripped off is freight.

“The distributor will charge freight based on a percentage of the overall cost of sale to them - anywhere from 10% to 15% is what I have typically seen. So, think of a  $100,000 product, the cost of freight is apparently $10 000-$15 000.”

An absurdity, contends Mr. X, especially if (as is often the case) the product is a combination of hardware and software subscriptions.

“Say $30 000 to $40 000 is actually the hardware and the rest is subscriptions. You don't freight subscriptions.”

Effectively, this provides distributors with fat margins that have little to do with the underlying costs of getting the product to market.

“The distributor is calculating the sell price to the reseller on an inflated exchange rate, freight that is on the total product, not just the hardware sent, and then adds margin on top of that as part of their cost of sale,” confirms Mr. X.

The upshot? “Overall, I've seen pricing that is up to 25% higher in this region that what it should logically be. I've worked from the vendor side many times, and getting a straight answer out of your supply chain at times can be very difficult.”

Justifying the higher price is an occasional strategy, with claims of ‘value adds’ which may or may not be true, says Mr. X, noting that any ‘adds’ are billed separately.

And even if, as an end-user, you have a cosy open-book relationship with your reseller, who in turn has an open book with their distributor, you could still be getting a jolly good rogering.

“So you see only 3-5% markup and think you’re getting a good deal. But that 3-5% is on top of the cost of sale price – and all that sits behind it, including the exchange rate and the freight.”

Which organisations are guilty of these practices, according to our source? Without naming names, Mr. X has this to say: “I've dealt with five of the top distributors in the country, and had a similar experience across the board with all of them.

"Some vendors think [the approach] is completely logical, others are very interested in what their customers are paying.

"When these second ones delve into it further, they generally find a lot of stalling before getting a call from higher up that it’s not their area of concern and that they should leave the matter alone.”

We’ll follow up on this story by requesting comment from distribution executives.