The channel has to work harder on its value proposition, stop competing on price and understand its cost model better for each particular vendor to ensure they have the right profit margin mix, according to attendees at CRN's Channel Roundtable.
At the same time, vendors have a responsibility to segment and understand the channel and assist channel partners to prop up their margins and stay profitable.
Peter Masters, general manager, marketing and operations at distributor Express Data, says many resellers do a great job understanding where their value lies -- but many don't and offer very little. 'One of the problems is that a lot of vendors don't recognise the difference among the resellers and I think there's a responsibility for vendors to work with the good resellers and give them advantage and work with the good distributors and give them advantage,' says Masters.
'The days of a level playing field are absolutely gone and for many vendors it's a mantra that it must be a level playing field -- you've got to be fair to all resellers. I think the smarter vendors are saying that's actually a very destructive strategy, you'll get the worst customer satisfaction, because what happens is you'll get the cheapest guy will do a drive-by shooting and have a terrific chance at the deal. And the only reason he can be cheap is because he's desperate or he has no interest in adding any value,' he says.
Phil Cameron, PCD channel manager at IBM Australia, says that from a vendor's perspective channel margins are only part of the story. 'As a vendor, you've got to balance what's the right rebate, what's the right price protection and what's the right [product] rotation. It's a fine balance -- at the same time you've got to have a competitive web price, because we're dealing with vendors out there that try to sell totally against the channel model,' he says.
A huge component of a sale gets lost when a vendor decides they are going to reward a distributor or reseller for the amount of service level that they provide. 'The big reward should be actually winning the customer, says Nick Verykios, managing director at LAN Systems. 'That's not taking into account where a vendor determines a pricing strategy or rebate strategy for a deployment. You've got to consider how much effort was taken into winning the deal in the first place and protecting that drive-by shooting,' he says.
He says the channel cannot count on things like rebates and price protection because it is a moving target. 'If I was going to base my business on rebates, I'd have an unpredictable P&L and the rest of my board would shoot me for running a ridiculous business. 'Rebates are paid to shape behaviour as opposed to rebates paid to put into your P&L and to move you in certain ways and partner with particular resellers. It will help me if I use it to generate and build demand that is protected,' Verykios says.
'We're starting to see some clever movements with some vendors that are partnering resellers with distributors to win certain deals because of the level of input you've put into the ability to win that deal. That's when it starts to work; that's when you start keeping the money,' he says.
He adds that the industry has to realise that the power to create demand should stay with the channel because no vendor can scale to the amount of demand.
Colin McKenna, managing director at Avnet, agrees that the way rebates are paid is critical. 'Certain vendors pay rebates in a way that they're just passed through as part of the margin, so it's lost to the channel. Others are more structured, so their back-end rebates tend to generate real profitability in the business,' he says.
Masters adds: 'It's a double-edged sword. Nobody wants the rebates to be taken away because it makes a heck of a difference when you make a rebate.
'They're a method of control of the vendors to make sure they get the behaviour that they need. If the behaviour is the right behaviour and it's what needs to be done, there's no issue, but often that behaviour is not necessarily the best for the channel.
'There's terrific pressure on distributors because on the one hand a lot of the resellers are doing it tough and looking at ways to take costs out of their business, so they look up to the distributor and say: 'How can you help me take some costs out of my business, can you do more for me?'
'On the other hand,' continues Masters, 'a lot of the vendors are looking at ways to cut costs out of their business as well. They're looking at the distributors saying: 'Are there more things you can do to take costs out of my business and we will pay you for doing those things that we're no longer going to do, but we'll only pay you if you make a target'.
'The distributors are sometimes in a position where we change what we do, going to have to invest on the hope that we're going to make a target and then we'll get paid for the work we did. That's not terrific business,' Masters says.
Profit margins on products are continuing to drop as these products become commodities. Masters says he recently went through the company's 1999 price book and picked a basket of 20 products that are still in existence today. 'It [pricing] is half now -- four years later. So in other words if you're just selling product and relying on the margin for product, you have to sell twice as much today as you sold in 1999 to stay still. And that's in a market where the overall margins are coming down overall by a point a year,' he says.
Verykios says defining a commodity item is like defining God. 'What's commodity mean? It's being defined by price, not by the function of the product and we're talking about these things becoming commodity and being sold at commodity level purely because of the price equation.
'But at the end user, there's nothing discretionary and non-considered about these technology purchase decisions. They're highly considered -- they're buying business productivity -- there's nothing commodity about it, therefore it requires a high level of considered sell. '[They need] a high level of expertise not only in the technology but in the vertical and the application that you're using. These people are becoming consultants -- you can't afford to do that with a commoditised price when the product isn't commoditised. I'm not talking about printer cartridges here -- I'm talking about full-on CRM solutions or IP telephony solutions.
'You look at some of these IP telephony solutions and resellers competing with each other on two-, three-point margins -- you've got to be kidding. By the time you even think about what it does, you've lost that,' he says.
Despite the miniscule product margins in the PC market, for instance, Verykios claims there's nothing commodity about a PC. 'If you think about what it does and what people are using it for -- it's ridiculous that there are two- to three-point margins on a PC. It's delivered like a fridge but the selling is more considered,' he says.
Steve Martin, manager, partner relationships at Novell, disagrees, saying with a multitude of retail shops selling PCs, it is a commodity item due to the buying cycle. 'The buying cycle for individuals is: 'What is the price -- what are the specs? I'm an intelligent buyer and I know what I'm after'. They don't need a sa
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