The Pinch of Margin Erosion: Dealers Walk Fine Line in Serving Customers While Protecting Profits

If the last four-plus months have taught us anything, it is that we, as office technology dealers, need to take care of ourselves just as much as others. That sounds terrible in an era when we’re all asked to make sacrifices and contribute to the greater good in any way we can. But it’s also true.

The COVID-19-era dealer is getting hammered on multiple sides. End-users have not only scaled back on their buying activity, but many have sought out payment-relief requests with financing companies. Those businesses that weren’t completely closed were skittish about allowing outside people, such as sales and technical service, to pay a visit. Tales of customer woes are all too common and have been retold ad nauseam.

The same goes for employees, as corner offices and HR folk alike have grappled with staffing considerations, using various combinations of layoffs and furloughs, as well as federal and state assistance programs. The down period may have given employees time to learn new skills and gain more market savvy, but it’s also given them time to spruce up their resumes and take a deep look at the opportunities offered elsewhere.

These are only the most surface-level concerns dealers have had to tackle during the pandemic, and doesn’t count other unrelated, downward pressures being felt. Fortunately, the economy was doing well prior to mid-March, putting many dealers in a more-favorable position to absorb the COVID decline. But as the months wore on and concerns of a relapse or flare-up (or whatever term you want to use for the recent rise in positive tests across numerous states) appear justified, the dealer was left with an incontrovertible truth: it won’t be of much use to its clients, employees, OEMs/vendors and other partners if it isn’t able to take care of itself first.

The theme of this State of the Industry report will invert the law enforcement motto: serve your clients and employees, but protect your profit margins. This month’s dealer panel will share some of the more-common pitfalls and stumbling blocks that can have a deleterious impact on margins, and talk about how it has been able to sustain the COVID period and ensure the company itself is getting paid.

At Woodhull LLC in Springboro, Ohio, it’s been a matter of paying close attention to detail. During the last few months, the company has been closely scrutinizing its performance metrics on a weekly or monthly basis to gauge how specific areas (color versus black-and-white clicks, service and supply requests) are bouncing back, according to CEO Susie Woodhull. Black-and-white clicks are down 36% compared to a year ago, which is comparable to what she’s heard in webinars from fellow dealers. Supply requests have rebounded quicker than service requests, probably because K-12 clients have been in shutdown mode.

Doing the Math

Woodhull furloughed half of its employees across all department through Memorial Day, in line with the Paycheck Protection Program requirements. Techs are performing at approximately 60% of normal service calls per day, which means parts usage is down, which has been beneficial for managing costs. On a year-over-year basis, service department profitability is about the same, and actually shading a couple of points better, due to reduced parts usage.

One tactical move that proved beneficial beyond what Woodhull could have known at the time was the decision to consciously change the sales incentive structure from hardware only to include the aftermarket revenue at the onset of 2020. “We modified our sales reps’ commission plan so that they would get a piece of the profitability of the contracts that they were selling,” she explained. “This allowed the reps to make some commissions on aftermarket revenues while protecting the aftermarket at the same time.”

If you’re not bundling, you’re missing an opportunity to simplify invoicing for the customer.

– Susie Woodhull, Woodhull

Woodhull leases upwards of 95% of overall equipment sales. The lease and aftermarket are bundled into a single payment. For example, in a five-year term, the customer’s aftermarket is added to the lease payment simplifying invoicing and payment schedule for the customer.

“A lot of times, dealers are reluctant to bundle the aftermarket side of their contracts with the lease payment because you need to have a minimum base billing for service,” Woodhull noted. “A lot of dealers are feeling the pressure to bill for usage only but this is not always best for the customer. If you’re not bundling, you’re missing an opportunity to simplify invoicing for the customer.”

One of the saving graces for Fraser Advanced Information Systems of West Reading, Pennsylvania, was the decision to diversify its portfolio of offerings during the last few years to extend beyond MFPs, copiers and clicks. Its managed IT services group has witnessed substantial growth during the pandemic, buoyed by its strategic ability to provide value-add to clients through new services and bundles. Work-from-home packages paved the way to opportunities for bundling Microsoft 365 training, security solutions and other services, with and without print devices.

Melissa Confalone, vice president of sales for Fraser, notes that with business either returning or preparing to come back to the office, the dealer can provide touchless print release to minimize the exposure to the high-touch surface of the MFP touchscreen. That has provided a buffer to insulate profits.

“With Sharp MFP Voice and Alexa, as well as numerous mobile solutions, we are helping our clients adapt to the changing environment of working both in and out of the office,” Confalone said. “We also believe that managed print services will be a big opportunity moving forward as we right-size clients with their new office space and maximize usage on cost-effective devices.”

We also believe that managed print services will be a big opportunity moving forward as we right-size clients with their new office space and maximize usage on cost-effective devices.

Melissa Confalone, Fraser Advanced Information Systems

Confalone believes there are no details too small for a dealer’s watchful eye. She believes it’s important that partnerships with manufacturers and leasing companies are strong, and that Fraser is utilizing all of its offerings to drive profitability.

“Just upgrading clients without adding new services will result in flat or reduced aftermarket revenue,” she said. “We must continue to find ways to add monthly recurring revenue to accounts.”

Timing has been the key for Bay Copy of Rockland, Massachusetts, which recently renewed a five-year contract with a health care provider in the state, a pact that includes the leasing/purchase of 500 units, along with installation and service. Its health care vertical client base, combined with applying for the Paycheck Protection Program (PPP), enabled the dealer to keep its technicians on the payroll while emphasizing service and additional office products for existing customers.

“It’s always a challenge to balance the profitability of sales and service against the desire to keep everyone busy and keep the work coming in,” noted Ray Belanger, Bay Copy CEO. “It’s important to take a long-term view and remember that we have been through downturns before and have survived them. The missteps are when a dealer is not open to examining new potential profit centers and hunkers down with what has worked in the past…they adopt a `we’ve always done it this way’ thinking.”

It’s important to take a long-term view and remember that we have been through downturns before and have survived them.

– Ray Belanger, Bay Copy

Peer Groups

Like several of our panelists, Belanger is a member of the Select Dealer Group (SDG) peer organization, which uses benchmarking and other metrics to measure performance against fellow dealers in a number of key disciplines. It’s not solely number crunching; dealers provide anecdotal observations and ideas for fellow members to enhance productivity, find efficiencies and eliminate costs.

“These meetings keep us on our toes and help us be open to new ideas and new ways to remain profitable,” he noted.

According to Belanger, MPS miscalculation is one of the biggest culprits in negatively impacting margins and profitability. The same also holds true for service pricing.

“This is a time when dealers should work hand in hand with manufacturers to look for the best incentives to pass on to their customers,” he said. “Times like these make us realize how closely we are all connected in the chain of commerce.”

The trend of dwindling clicks didn’t really become an issue for Pulse Technology of Illinois until the pandemic struck. Prior to that, the MPS and cost-per-copy programs kept escalating, keeping the dealer in a strong position. Chip Miceli, president and CEO of Pulse Technology, notes that from an operational standpoint, the primary challenge comes from closing clicks over time and not readdressing them in the service arena.

When COVID-19 brought much business to a screeching halt, Miceli grappled with whether his company would be deemed an “essential” business. He also wanted to devise the best plan of attack for doing business in the new (or temporary) normal, and decide whether to take a sales or service approach. Miceli took to Zoom conferences with his colleagues in both the SDG and American Co-op to discover a way forward, and that entailed the home delivery of products for end-users forced into work-from-home environments. In a matter of weeks, Pulse Technology was back on-site.

When the service aspect of the business suffers, that is where the breakdown begins.

– Chip Miceli, Pulse Technology

In Miceli’s estimation, the biggest misstep being made by dealers is going after the sale itself instead of focusing on its profitability. “It’s important to remember that we make money not so much in the sale of the copiers and MFPs, but in the servicing,” he said. “When the service aspect of the business suffers, that is where the breakdown begins. We’ve seen it during the last year when companies have cut prices on servicing so low that they cannot sustain their operations.”

Careful Planning

Miceli feels one strategic gaffe was made by dealers who received PPP funding and opted to keep everyone employed in order to secure the forgiveness. “I don’t think the economic issues caused by COVID, or COVID itself, will end as quickly as many hoped,” he maintained. “It makes more sense to have a clear plan in place for how to use the funds that so many applied for and received. Some of what we did was keeping our technicians up to speed on the latest training, even when we did not have enough service calls to justify their being on the payroll. It’s important to think long term and we understand the value of staying on top of the very latest in training techniques.”

Pulse Technology has instituted a forgiveness program, in which the dealer has worked with its leasing providers to extend the deals from 60 to 63 months. Miceli notes the impact on his cash flow is temporary, and the benefit to the customer will be more beneficial in the long term. He likened the pandemic to the Great Recession of 2007-2008, which the company was able to weather and come out of in a strong position.

Operating lean is a matter of survival for Integrated Business Solutions of Hawaii, with its headquarters in Aiea. Perhaps one of the biggest tactical moves made by CEO Mike Murray was to become a single-line dealer. When managing multiple lines, he explained, a dealer must carry two to three times the inventory in parts, supplies and machines. That also translates to time and dollars invested in service and sales training.

“Our people became more familiar with the single product line and we became experts on those products,” Murray said. “We were able to secure more-competitive pricing from one vendor because we could leverage our buying power. This made a significant difference in our profitability than any other thing that we have tried. We’ve also made a couple of strategic acquisitions.”

In our situation, on a rock in the middle of the Pacific, MPS was not profitable.

– Mike Murray, Business Solutions Hawaii

In an example of a one-size-fits-all approach failing, Integrated Business Solutions was initially sold on the concept of MPS as a high-profit source. “In our situation, on a rock in the middle of the Pacific, MPS was not profitable,” Murray noted. “We scaled that back and looked at only opportunities that worked for us and were, in fact, profitable.”

At Function4 of Sugar Land, Texas, the company has focused heavily on products that improve a client’s situation as it relates to process improvements, accessing information remotely, cybersecurity, unified communications and MPS cost-cutting options. According to Brad Yocum, market director for Function4, all conversations are intended to focus on the customer and its desire to improve or modify, depending on its particular needs.

As others have alluded to, the devil is in the details. “Conversations with our sales groups are focused on identifying the issues with the client and to not overcommit during this time, when we are all very eager to get new contracts on the books,” Yocum said. “Missing important information or not clearly defining scopes of work can kill any profitability by consuming multiple resources not properly allocated for.”

If we focus solely on the hardware business and don’t look for areas where solutions may be valuable, it becomes purely a pricing scenario.

– Brad Yocum, Function4

Herein lies the danger: in an era when new revenue is scant, turning to pricing in order to seal the deal was, is and always will remain a slippery slope. “If we focus solely on the hardware business and don’t look for areas where solutions may be valuable, it becomes purely a pricing scenario,” Yocum said. “Companies need to improve many processes at this time, and we need to find out what they are and help them get there.”