The money is in the toner, silly

SPEAKING TO A PRINTER VENDOR is a little like listening to your mum reminding you to eat your vegetables. “How many times do we have to tell you? The money is in the consumables,” my dear old Mum used to say. “If your printer customers are going down to the stationers to get their replacement cartridges, you’ll miss out on all the margin,” she would warn.

For a small business, the price of office printing can run as high as one to three percent of total business costs according to some research. That’s a serious chunk of change and it makes the purchase of a printer a considerable decision for many. That translates to time and sales effort on your part. And that’s before you get the new printer installed and set up for them.

All that translates to effort for a surprisingly small amount of money. “Okay, so maybe selling printers is not a total waste of time, but surely there’s more money to be made from it than this,” my Dad used to add.

And the printer vendors would point out that they reduced the device costs as much as possible to make the initial purchase more affordable. Then they make their gross profit on the cartridge sales over the five-year life of the printer.

It’s a simple business strategy that works for razor blades, payTV and drug dealers. So why haven’t printer resellers retired on the annuity from all those printers they sold in the Y2K rush? Because OfficeWorks, Corporate Express and a thousand other stationers are all reaping the benefits, while the reseller is doing the hard yards convincing another customer to outlay for a new piece of hardware.

Without that fat annuity of regular consumables sales, the printer business is just part of the full service offering you provide your SMB customers. If you can get on that three-, five-, or even seven-year gravy train of toner sales after the printer hits the desktop is an entirely different matter. Printer vendors will explain that even though this has been the business strategy for a decade: “Getting resellers to understand that is one thing. Getting them enthusiastic about acting on the knowledge is another challenge entirely.”

Hewlett Packard is a case in point. CRN spoke to Luke Duggan, commercial and enterprise manager for HP’s South Pacific, Imaging and Printing Group. What this leading printer vendor had to say about the past few years was as telling as it was instructional.

Hewlett Packard historically has a three- tier strategy and has mostly been a good (if not perfect) partner to the channel over the years, but Duggan admitted the company was more interested in taking printer business direct earlier in the decade. He said it was because HP just couldn’t get resellers to sell printers the way HP believes they should be sold.

Duggan talked about a contractual rather than transaction-oriented model for printer sales. With the release of its high-speed,cost-effective multi-function lasers, HP found it began butting heads with the established and contracted office photocopier empires, which charged users on a per copy contract with device, consumables and servicing all bundled into a flat rate per page.

HP and its partners, coming from the traditional IT model which saw the hardware as one deal followed by a series of consumables sales with an increasing service requirement as the printer aged, had to adapt to the customer’s way of thinking.

The added pressure of non-genuine consumables eating into the annuity stream it had done its costings on may have had a lot to do with HP’s thinking about this go-to-market model, but there’s no doubt the company wanted a piece of that hot photocopy market and resellers just weren’t ready to listen. The company was forced to go direct, or so the argument goes.

That’s changing, said Duggan and more resellers are interested in leveraging the ongoing annuity that a consumables contract can bring into their business. “Two or three years ago HP was focused on direct. That has come full circle and HP is now thinking about the channel,” said Duggan. “The difference is the amount of mindshare we are getting from the channel.”

Duggan, goes further, saying MFPs and contractual sales go “hand-in-hand” as though it’s the only way to sell a printer with scan capabilities. “With the launch of MFPs the opportunity was there, but now it is better understood and there’s been a shift away from transactional to contractual sales,” he said. “This has been the most pronounced in the last six months.”

Now HP claims about 10 percent of resellers are taking part in HP’s Smart P.R.I.N.T. (Central. Printing Resource, Information & Technology) programs which help deliver print management services to clients. HP will even white label the service. Resellers are benefiting from triple the margin as a result, said Duggan.

The issue of ongoing consumables sales is one you hear from all printer vendors. Graham Harman, general manager of printer vendor OKI Printing Solutions is another example. Harman stressed how important it is for resellers to get a good share of the consumables spend from the printers they sell and install. “Resellers need to work out how to get that market, or regular stationery retailers get the benefits,” said Harman who said research suggests 50 percent of the cost TCO over the full life of a printer comes from consumables. The next 10 percent is paper. When you factor in other costs, that doesn’t leave much for the initial device cost.

“The resellers are sticking machines on the desks, but it is the stationer who is getting all the margin,” jibed Harman. “The trouble is that they don’t want to carry a whole range of consumables.” The best strategy he said is to pick one vendor and specialise on that one so you can stock the range.

Not everybody agrees with that strategy. James Rendell, marketing manager of printer consumables distributor Tonnex, suggests another approach for resellers wanting to grow toner sales.

Rendell said it’s better to stock the full range. He said resellers with a retail presence get a list of the fastest moving stock from the Tonnex account managers and start with those. Put them in plain view to prompt the walk-in customers. Send flyers out to your customers and do whatever you can to promote the fact that you stock consumables and never, ever say “we don’t stock that model cartridge”. If you don’t have the stock in store there are distributors such as Tonnex that can drop ship with a fast turnaround. Mostly people aren’t buying toner as an urgent requirement. Usually, explained Rendell, the low-toner light has been flashing at them for a week and they figure they better do something about it before it runs out completely.

For other resellers, Carmel Mosser, general manager, SMB and channel at Lexmark ANZ said there is a certain amount of transaction phobia among IT resellers who don’t rely on their retail presence. Items such as consumables are seen as small ticket and more trouble than they are worth, but Mosser warns them they are missing out on potential profits.

Getting a piece of the consumables action is a key strategy to making print a worthwhile business to be and, Mosser points out, print is one of the few IT products that has any sort of revenue annuity attached to it that goes on and on for years. Accessing that annuity can maximise the margin for resellers and by servicing the customer properly you can better lock in the next printer sale.

“Resellers are shy of transacting,” she said. “It is about not being afraid of talking about supplies. We train our resellers to ask a set of questions: Where do you buy your consumables? How do you buy them? Where do you store them? Often the purchasing patterns for printer consumables are disjointed with no clear demarcation of responsibility. If the customer is willing to centralise and order everything through one account it can mean great cost savings for them and more margin for the reseller.”

In this day and age when the printer can email you to tell you it’s low on toner, there’s really no excuse for not being more proactive and preemptive about getting this business.

All that might be too hard for the average reseller who’s more interested in selling new servers, setting up networks or looking at moving into Unified Communications.

“They need to become creative in the way they sell the machines,” said Harman. One option is total fleet management such as the HP printer services mentioned above.

Harman said OKI has the management software to monitor the equipment, do electronic meter reads and generally assist in this sort of management process. But there are still risks and challenges and Harman has a few words of warning.

“That business is like gold if you can handle it, but you have to be up to the challenge,” he said. “If you take over management of the customer’s legacy print environment you might be taking over ownership of printer brands you have never dealt with before. Then you have to have the management tools and somebody has to do the meter reads and work out the accounts and invoices.

To some degree it is a critical mass issue where you have to have the processes in place and you need a base of machines to make it worthwhile, explained Harman. Then you have to get the pricing right. If you are charging per page, you have to come up with a cost per copy. The industry average is five percent print coverage, but that’s pretty light printing. If your price per copy is too low you could lose your shirt.

All the same, Harman points to big brand companies such as Bunnings and IAG (NRMA), both of which have recently announced they are outsourcing their entire printer requirements to a third party.

There is certainly a trend and companies such as HP with its Smart Print services are working on ways to make it possible for smaller resellers to participate in this sort of market without the risk.

Lexmark, for example is in the process of introducing a new program dubbed Total Care Managed Print Services. It’s designed to help the Lexmark channel sell print solutions while helping Lexmark control the flow of genuine toner cartridges into end-user organisations.

Tim Champion, sales and marketing manager, Lexmark ANZ SMB division told CRN the Total Care solution came out of an analysis of what resellers have been doing compared to how Lexmark would like them to think about selling printers, namely, consumables. But the new Lexmark partner program puts the profit in the resellers’ hands up front, there’s no annuity — just a big fat margin cheque when they first sign up the customers.

It’s a different approach which basically bundles the device, plus service and support with enough toner for three years of operations all into one deal. Champion said it’s a way for resellers to “access lucrative new revenue streams that they haven’t been able to access in the past because the IT resellers have found the barriers to entry (into managed print services) are too high”.

“We set about trying to break those barriers down and are trying to introduce IT resellers to these revenues streams as painlessly as possible. So, with Total Care Managed Print Service for SMBs the service is sold by a reseller, the device comes from a regular Lexmark distributor and is installed by the reseller, but bundled in with the sale is a three-year supply of toner which is all managed by Lexmark,” he explained.

The customer pays a “very competitive” price on a set monthly fee and has a fixed amount of toner they are permitted to use over the three-year period.

Lexmark takes care of the rest. It facilitates the finance and handles all the phone support, break fix and toner fulfilment.

The customer get access to a MyLexmark web portal where they can log on to view what consumables they have left and access features such as asset management reports. The reseller makes its margin on the device sale plus the three-year supply of toner up front when the deal is first done.

“The whole idea is to give the reseller a chance to taste the idea of managed print service, and if they like it they could get involved,” said Champion.

With consumables such a critical part of the printer ecosystem, resellers must access this revenue to make it worth carrying the SKU. Printer vendors are beginning to realise that. So just like your mum did, they are putting a little gravy on your vegetables to make them easier to swallow.

By Adam Gosling