It seems like copier machines have always been sold a certain way but maybe that’s about to change as office equipment buyers research alternatives in an environment of declining print volumes. As buyer behavior changes and disruptors prepare to take advantage, many of the legacy channel players will face increasingly strong headwinds.
In a mature industry, there are usually dozens of established players, each of whom has a turf to protect and considerations to meet. However, even the largest players cannot prevent the changes sweeping through legacy business practices caused by the conversion from analog to digital. For the first time in the history of commerce, the balance of power is switching from the supplier toward the buyer, as the transition to a “pull” economy takes place.
In the legacy “push” economy, manufacturers had enough power to push the configurations they favored on their customers. However, in today’s changing “pull” economy, consumers have the power to choose the products and services they prefer, configured the way they want them. Manufacturers and resellers that recognize this change will thrive, even in a mature, shrinking market—that is, provided they offer customers and prospects with easily configurable resources that quickly and easily meet their needs.
Adapting to the “pull” economy requires changes to legacy business practices. However, change introduces risk, and risk instills a fear of failure. It is this fear that underlies the tendency to cling to outdated business models and ignore powerful signals indicating the need for change. Sticking to the past means being left behind, and being left behind results in an inferior value proposition, fewer new customers, reduced profitability and increased customer churn. Combining all these negative business trends with a shrinking market turns into a downward spiral with one (usually bad) outcome.
The Distribution Channels
For decades there has been a clear delineation between the office products (A4) and equipment (A3) channels. This delineation exists despite the selling structures being similar in terms of the value-chain sequence that takes place between manufacturers, wholesalers/distributors, and independent resellers (dealers) who serve the end customers.
However, what is significantly different is that office product channel sales are generally transactional, while office equipment channel sales typically take place via monthly service charges.
Office Products & Supplies
Equipment manufacturers such as Hewlett Packard, Epson, and Brother make up a significant portion of total sales with their printers and associated supplies. However, these products are surrounded by 50,000-60,000 other, mostly commoditized, office products such as paper, pens, break-room, and janitorial supplies, plus technology products such as PCs and accessories. For the most part, this vast catalog of products works its way through the distribution channels in a series of transactional sales that culminate with the end consumer.
Transactional sales are vulnerable to competition. Because they’re mostly commoditized products, it’s relatively easy for customers to switch from one supplier to another for a better price. With Amazon in the office products space (and usually having the lowest price), more and more consumers and businesses are using them to purchase their office products, technology, and supplies.
Resellers are finding they have to reduce prices to fend off this competition. This pricing action reduces the top line as well as profitability, with no end to the downward spiral in sight.
Office Equipment (Print)
Many of the same hardware manufacturers that operate in the equipment channel are also in the office products channel. However, different machines (termed as A3) have typically been sold into this channel. A3 devices are usually designed for high-volume printing, collating, stapling and other paper-handling characteristics with a maximum print size of 8.5×17”, versus the maximum 8.5×14” (legal) available from A4 printers more widely sold through the office products channel.
- Unlike A4 equipment, it’s more difficult for a consumer to research new A3 machine prices independently. Furthermore, getting access to sellers is also carefully controlled by the OEMs who assign territories to their authorized resellers.
- The internet has no boundaries that explain why new copier machines aren’t listed for sale on reseller’s websites. There is no way for the OEMs to control territory boundaries if they were to allow their dealers to post their offerings online.
- Also, unlike the office products channel, most print channel sales are cloaked under monthly lease payments and “per-click” charges. Resellers charge monthly service fees that are usually inclusive of equipment repair and the supplies needed to operate the equipment.
- There has been an evolution of ecosystems designed to facilitate the digitization of documents, reducing the print volume that underlies the entire business model.
As a result of these factors, it’s more difficult for customers to make cost comparisons between dealers, brands and their respective ecosystems. These circumstances help explain why historically, it has been a much “stickier” sale for the equipment dealer than for the transaction-based business model of the office-products dealer.
However, even though churn rates have been typically lower, it’s now becoming much harder for equipment dealers to ignore the impact of declining print volumes.
The table is designed to highlight the problem facing resellers in the print channel. Historically, it has been common practice to roll customers into new leases for replacement equipment. In this example, we’re using a $350-per-month lease payment on equipment sized for 50,000 pages per month. Including supplies, in a cost-per-page model of $0.01 for mono and $0.04 for color, and a $40-per-month services contract, the total client cost over four years is $0.03 per printed page, or just over $70,000 at 100% machine utilization.
On the face of it, a blended cost of $0.03 per page is a competitive deal. However, the underlying problem is the actual degree of utilization that’s likely to take place on the machine and, to realize $0.03 per page, it requires 100% utilization. What if it’s only 10% utilization because the client needs to print 5,000 pages per month rather than 50,000? In these circumstances, the cost per page increases by almost 250% to $0.10 per page.
A more-appropriately sized machine (Case 4) may only cost $1,000 and bring the four-year expense down to $6.5K at a cost per page of $0.027. Not only is this a 10%-per-page savings over the original $0.03 benchmark but, more importantly, it’s less than a quarter of the annual spend to print the same amount as it costs to generate the print on an under-utilized A3 machine.
Think about the problem this creates for the equipment dealer. At 100% utilization on a heavy-duty A3 machine, there’s a revenue stream of nearly $18,000 per year. At 10% utilization, the revenue stream is $6,000 per year, and with a low-cost A4 machine substituted in, the revenue stream is $1,600 per year.
While few machines are ever likely (or even intended) to be 100% utilized, let’s assume the most-realistic expectation by the reseller at the outset of the lease is for an average utilization of 50%. That means the expected revenue from that single placement would be just over $11,000 per year.
With print volumes declining and utilization at 10% (or 5,000 pages per month), the revenue stream drops to $6,000 per year, or nearly 50% less than the original, most-realistic expectations. Think about this 50% revenue shortfall across an equipment dealers’ $10 million business.
Now consider the revenue shortfall of an appropriately sized A4 machine purchased for approximately $1,000 in which the revenue stream falls to $1,600 per year, or 85% less than expected. Think about this revenue loss in the context of a $10 million dealer business, or from the perspective of a customer with whom the salesman has usually expected to routinely roll a “soon-to-expire” lease into a new one.
How likely will it be for this practice to continue in the context of the 70%-plus of buyers who now choose to do their research? These buyers may rely on a salesperson for product information, which is likely to be slanted toward the specific manufacturer(s) and their ecosystems. All the customers have to do is work up a table, just as we did above, and chances are they’ll abandon their “lease-renewal-autopilot-mode” to head toward that $1,000 printer they’ve independently learned is a significantly lower-cost solution.
Ultimately, they will either buy the appropriately sized equipment from their current dealer, (who is forced to swallow an 85% decrease in revenue), or they will buy it from someone else.
Of course, most equipment resellers (and legacy channel manufacturers) are becoming increasingly aware of this problem. But because the solution requires facing-up to 50%+ revenue declines, they are constrained from taking action.
It has been possible to absorb pressure and delay changes to the business model because all the major players in the A3 channel have faced the same common problem. This means, unless one of them breaks ranks or a new entrant arrives to disrupt the status quo, the industry has been able to prolong its ability to push over-priced solutions, whether it resulted in paying for unwanted capacity or not.
Unfortunately for the legacy players, prolonging the over-priced solution is tantamount to having kicked-the-can down the road. While it was possible to maintain this approach in a “push” economy, it’s no longer sustainable in a “pull” economy—buyers are increasingly well educated and eager to transact with providers who allow them to configure products and services according to their needs. So, while the apparent business dilemma may contextualize the reasons legacy channel players have resisted change, it doesn’t alter the facts, and it’s not going to stop the tsunami now looming over the horizon.
