Boosting margins in an economic slump
With the country experiencing the trickle down effects of a slowing global economy, many New Zealand businesses are feeling the pinch. There is escalating pressure on consumers’ disposable income which has a negative flow-on effect to the channel. Soaring fuel prices, rising food costs, the high kiwi dollar, and the rapidly deteriorating housing market all point to the fact the credit crunch is here.
It’s no secret that New Zealand’s major banks source a large proportion of their funds from foreign money markets to lend to businesses and households. This overseas borrowing, a tight labour market, and official figures showing job losses of 29,000 in the March 2008 quarter, are prominent factors in rising inflation.
Many businesses are now facing the task of maintaining attractive margins amidst the financial crisis. It’s time to get creative and think outside the square when it comes to high margin opportunities.
Going beyond the transactional phase
It all comes down to attitude. Never treat a client or customer like a one-off transactional opportunity; get inside their head and find out exactly what it is they want and what problems they are facing, and begin building credibility with the client by moving into a more consultative approach.
Clients, in a sense, want a ‘makeover’; they want a solution to whatever problems they are facing. Taking on a consultative attitude will move you into a trusted advisor position allowing a relationship to form that is strategic in nature.
Jeff Healey, Corporate Marketing Manager for HP, recognises that a lot of customers have complex work environments and want integrated solutions that require someone with the right attitude, expertise and knowledge to help make the right decision.
“What we like to advise the sales team working with the channel is they really need to aim to be more of a consultative sales person if they’re even to look to drive higher margins from what they’re doing,” he said. “If you’re passively reacting to customers’ needs, then you’re not influencing and you’re not adding value to their business and not understanding what they want.”
HP suggests four key areas to concentrate on during the sales process to help gain better margins:
- A genuine concern for customers
Most importantly, do it in a way that is perceived by the customer to be useful, needed and valuable.
Adopting these principles to form the right attitude builds customer confidence and supplier credibility, which can mean the difference between achieving high or low margins in any type of business scenario.
“Once you get those things out of the way and have established your credentials then you can move on from that transactional approach. You can start to add value around the margins that you choose based on the value you offer your customer. If you’re not offering value then you’re absolutely into a transactional sales situation, which really doesn’t help,” clarified Healey.
Another way to get past the transactional phase and really understand the customer is to conduct research. Mark Buckley, General Manager, Enterprise Business Group Australasia for Alcatel-Lucent, highlighted the benefits of being customer orientated rather than technology orientated, “because most customers are confused by that”.
About 2.5 years ago, Alcatel-Lucent conducted research into what its customers were buying and ordering from different parts of the world, which produced valuable information known as user profiling. The information has been implemented into sales training and “it enables the sales people to have more of a business conversation and discovery of pain points rather than ‘let’s talk technology’ which leads to higher margins”, said Buckley.
The key is to both understand who your customers are and the business risks they face. “The more pain a customer has in their business, the more willing they will be to spend money to fix it. Often verticals can have customers with similar issues, so being able to deliver a solution for one customer that can be cookie cut, will help you gain more margin in the future as you are reusing your IP,” said Phil Presnall, NZ Country Manager for Netgear.
Nick van der Plas, NZ Country Manager for Emerson Network Power, agreed on the importance of understanding customers’ pain points. Look at the long term business relationship, not just a quick sale. “If the right [power and cooling] solution is put in on day one, then not only will the reseller make good margin, but they will save money by not having to do rework, and not having to supply other equipment that should have been put in there in the first place,” he said. “See, the danger is someone will go in and say ‘I want the lowest cost box solution’, and I supposed that’s the risk when the knowledge level may not be very high. Our thinking is, well, cost is important, sure, but to have the right engineered solution is probably more important.”
Indentifying high margin opportunities
Buckley emphasised the need to provide customised solutions. “Through specific customised solutions the partner then becomes entrenched with the customer’s business and they can’t easily be replaced, and that comes down to repeat business and up-sell opportunities.”
Buckley said Alcatel-Lucent provides its channel partners with a “development house” which enables business partners to have access to its professional services. A business partner can get into a new part of business that is higher margin by taking up these professional services, such as developing customised solutions at an international level, which can then be on-sold to the customer.
Take advantage of any vendor or distributor provided sales education, in the form of webinars, global case studies, road shows, web portals, and seminars to better improve your odds.
Buckley stressed that the virtualisation trend offers a key opportunity for repeat business: “You can get a lot more margin out of it because you’re not having to go back from scratch again and do different deployments.”
Being knowledgeable and credible is critical, said Stuart Alexander, Sales Director at Value Added Distributors (VAD), which will pave the way for on-going business. “We have a strong knowledge base and we certify all our resources and that’s primarily because our business is solutions orientated. A more functional, more accurate solution means more margin for the partner in terms of their ability to deliver the outcomes of what the customer is looking for.”
While he acknowledged that it is very difficult to drive margin in a product space when there are multiple distribution or multiple vendor partners in that same space, Alexander went on to say that better service means a better relationship which tends to mean more margin.
Paul Dowd, Marketing Manager for distributor Digital Blue Ltd, has found the most successful way to help his channel partners identify high margin opportunities is to work with each partner individually and tailor a solution to suit each one.
“What we find is most effective, is to have separate programs running with each major partner. That gives them opportunity to get high margins without competing on those high margin products with our other partners, which we’ve found some other companies are doing, which in turn actually degrades the margin on those supposedly high margin products,” Dowd explained. “It means they have a one off product that they can use to get their own margins up.”
Untapped opportunities in the marketplace can be found by keeping on top of industry trends, spotting what is ‘hot’ and continuing with education and training.
Watchguard’s Scott Robertson believes the most obvious untapped opportunity in the security space is in services. “I think the greatest opportunity is for resellers to tap into that security services component to increase their margins and to become more of a security minded organisation, and that, in turn, gives them more opportunity to sell their own security and networking advisory services,” he advised.
There are also opportunities around providing services around a customer’s data and data profiling — how customer information is stored and how it is collected. “There are good opportunities out there for the reseller community to have a look at the trends that are happening out there and choose to specialise in something that gives them unique intellectual property around what the customers really want, which is to use their information to make better decisions,” said HP’s Healey.
Gartner offers interesting insight into how failing to optimise pricing is essentially “leaving money on the table”. It offers ways organisations can determine the best pricing solutions, tools and services to improve margins and profitability. Basically, price optimisation attempts to improve market share, unit margin and overall profitability by assessing the relationship between the shelf-price and the quantity sold at that price.
Understanding the relationship between ‘quantity sold and the price’, as well as considering different variables which affect sales, enables the manufacturer to better guide retailer and reseller partners toward a pricing strategy that will meet the objectives of both parties.
- Assess the ability to work with external service providers on pricing programs
- Determine the level of process and technological complexity in current pricing tools
- Explore pricing model options that factor in financial and risk constraints
- Have pricing expertise in marketing, trade marketing, sales or sales operations that can capitalise on the capabilities
Other variables, such as the complexity of the business process and the level of integration required, need to be taken into consideration when searching for the best way to optimise margins in the marketplace.
Bundling and managed services
When it comes to increasing margins, it is all about selling a complete solution that will fix the client’s problems or need, rather than selling a whole lot of random ‘stuff’ that may or may not serve any real purpose for the client.
Profit margins on base products are usually very low in comparison to accessory sales. Margins can be improved with attachment sales; when a customer buys a commodity product, such as a PC, up sell with complimentary products. Attachment sales have the potential to improve gross profit and profit margins.
“The rang of accessories is very large now, so bundling is not very effective unless you can offer a base product with an option of, say five different things they can buy it with, and then that becomes a bundle,” said Digital Blue’s Dowd.
However, VAD’s Alexander warned that bundling can be a double-edged sword. “It increases margin because it’s increasing the volume of sales because it’s selling more of these pre-packaged things. But it only increases margin because of the increasing revenue — not increasing percentage in every sale. We’re more about increasing the percentage of margin in every sale,” he clarified. “Bundling potentially sells more if it can generate more services revenue for the reseller than a bundle of multiple products. If it’s just selling more products, that is also good for the reseller but they may be getting less overall margin.”
Increasing margins is not about taking the simplistic approach that higher margins can be achieved by bundling together a lot of products. “It’s bundling more items of perceived value into what you’re doing and they have to deliver a true business value and a differentiator as opposed to the ‘do you want fries with that?’ mentality,” said HP’s Healey.
Ali Fleming, Channel Services and Education Manager for HP, explained that customers are a lot more business savvy and are not sucked into freebies and gifts. They want something that will actually make their business better. It doesn’t always come down to cost and it will be surprising how much more customers will be willing to pay if there is perceived value. “Customers will pay for value that they perceive they’re getting and not just buying technology for technologies sake; they’re buying it do a business function and to get a business outcome.”
Managed services can be a great opportunity for partners to invest in. But to justify them, there has to be a unique capability on offer that can deliver a service at a total lower cost and at a much better standard than could be delivered in-house.
Many industry professionals agree that a lot of organisations are ready to hand over the management of their networks because IT is not a core focus for their business or they do not have the skills in-house. For instance, if a company can be identified to deliver a managed service, it can make economical and logical sense. It is important to offer progress reports of whatever managed service is being provided to demonstrate the value of the technology and services that are being offered.
“Managed services are most effective when the customer understands what they are getting and that lines up with what they want and need,” stated Netgear’s Presnall. “Show them on a regular basis the money you are saving them, or the business performance they are getting as a result of the contract they have with you. The worst thing that can happen is that you neglect to tell them what a good job you’re doing, and they take it for granted and don’t see the value you add.”
Although managed services and bundling are two elements that can potentially lead to increased margins, telephony as a service, communications as a service or software as service are other avenues to explore.
Staff training and education
Sales training, staff knowledge, education, and certification are critical. If there is no appropriate education in sales, solutions, architects, and the technical staff, the organisation could be hit with costly mistakes and major opportunities could potentially be missed. Staff training is key.
Alcatel-Lucent’s Buckley believes if training of staff is not carried out properly, it will eventuate in lost revenue. “They’ll put the wrong solution set out; they won’t qualify to find the high margin opportunities; there will be dissatisfied customers, and all of those things will just lead to the erosion of margin.
“We support our partners in the education and sales phase, in terms of solutions architect support, the technical side, the training, we need them to be making money and margin because the flow on effect comes back to us,” Buckley continued.
Staff training is one of the most critical investments that can be made. This includes training across all different levels – capability training, the ability to deliver the service or product, pre-sales, and proposing the right solution.
Selling should not be left exclusively in the hands of the sales staff. The technical delivery people may be a better position to sell different products because they are out on site, experiencing first-hand the customer’s issues. Everyone should know the products and solutions you represent, what they can do and what they should be matched up with for a complete solution, so your entire team can work more cohesively to create high margin opportunities.
Being certified and knowledgeable portrays competence and increases opportunities to become a preferred partner. Be clear and focused about the market you service and know when to walk away, as time spent chasing business that you don’t have a high chance of winning simply increases your cost of sale which, in turn, reduces your margins.