Beyond The Box

The subject of wafer-thin margins has now acquired prominence in the light of
drop in sales volumes of PCs in 2001-02. The problem, however, can be addressed
by vendors and partners working out innovative product positioning and customer
service strategies.

Dropping volumes in the PC market in the past year have brought to limelight
a problem, which was always lurking beneath the surface and that problem is of
margins. In the previous five years or so, margins on hardware were under
pressure but to some extent the growth in volumes made up for that.

But last year has put the squeeze on percentages and volumes. This has
pressurized channels to find alternative paths to profits. And while the problem
is more for channels, vendors too are under pressure to create value
opportunities for their partners. Both short and long-term solutions have to be
found if channels have to grow – as they must.

So, what does the average dealer do in this situation? One solution is to
wait and let the situation improve. That however is more of a hope than an
answer. The present margin crunch does not have its roots only in the depressed
economic conditions of today. Its reasons are more fundamental.

The basic nature of computer usage is changing. There are multiple customer
segments that have widely different needs and expectations. But product/service
offerings for them are still developing.

Understanding customers’ needs

The home segment buys computers for education, entertainment and Internet
access. This is further sub-divided on the propensity-to-pay equation.

There are some for whom brands are important for reasons of status or
perceived quality. There are many others who are in the price-sensitive band and
look for unbranded "save money" options. Their need for pre-purchase
selection services is often high.

These segments need basic software but beyond that they only need a machine
that does not breakdown or hang everyday. Once purchased, the computer is used
for relatively simple applications.

Hence, warranty, troubleshooting and a feeling of support security are
important considerations. There are services for which these customers will pay
– provided they feel confident that they will get their money’s worth.

So, what are the services that they will pay for? The obvious answer would be
the ones that suit their needs. But ask channel partners and the usual refrain
is – customers do not want to pay for all these. They want them free.

Customers do want to keep getting free what they have been used to or what
they consider are intangibles. At the same time there are markets where
services/add-ons have become saleable and provide decent margins.

Servicing of cars is one example. The amounts that are paid today are far
higher than earlier. Similar is the case of spares. In the case of mobile phones
there is a premium for the latest models. Old ones are quickly discarded. This
would not have happened a few years ago.

Essentially the problem of low margins here is a marketing issue and not one
of technical specifications. The approach has to be to the heart of the buyer
not his head.

A market waiting to be tapped

Moving on, mid-level organizations want more than just entertainment and
Internet access. They need service/support to make their systems work reliably
in small networks.

They also could use software support. Packaged or semi-customized software
are their need for basic database, financial applications that address their
primary businesses without too much of an effort.

Here there is an availability issue. Ask anyone the names of software
companies doing work for GE in the US and you will get the answer. Ask for
companies who can develop/assist software development for mid-level players and
there are no names.

The huge mass of mid-level users and suppliers remains a nameless entity.

Yet these are the needs which if fulfilled can drive this market and also
provide margins. It may not be a huge market. Yet it is not to be dismissed out
of hand. If one assumes that there are two million computers sitting in this
segment (40 percent of the installed base) and only Rs 2,000 is spent on each
computer each year, it is a Rs 400 crore market. Of course, apart from the
match-making issue there have to be worthwhile offerings.

Needs of large corporates

Large corporates have needs which run into multiple numbers on a regular
basis. Hardware for them is a cog in the wheel. Here the real issue is business
solutions.

Most of them have in-house departments for that. Many now prefer the
outsourcing model, provided they find the right supplier. There are a few
emerging in-house departments for many needs and they may or may not be willing
to pick up boxes of any type.

Here the concerns are at the overall systems levels and the box is just one
small part of their need. Since many of them are under budget pressures; prices
and costs are important considerations for them. But so is trouble-free working.

They will therefore prefer brands but not for style or status considerations.
Their preference would be for brands that promise trouble-free service at low
cost. In many cases they would prefer upper-end systems for processing and not
for games or other entertainment-related applications.

Channel players have to recognize and accept the existence of different
customer segments. Need differentials may not always be in technical
specifications, but the way customers are handled.

Mapping Strengths

If this becomes clear, channel partners have to map their strength areas
vis-à-vis customer needs. The problem is, the-one-size-fits-all approach.
Differences in customer preferences are not recognized – or not worked on
consciously.

This level of fundamental differences does not occur in most
other industries. You do not have dramatically different usages of the same
hardware by different sets of customers. In theory the market is structured to
meet these varying customer needs.

Box sellers are termed dealers/distributors while the more
service-oriented suppliers are termed VARs or solution providers. In reality
these distinctions get blurred.

Both, the channel and vendors have to recognize this and work
out significantly different product positioning and customer servicing
strategies. The trader/dealer has to make money by constantly rotating capital,
introducing new products and working towards higher volumes.

The vendor has to support them by brand building, better
credit terms, and warranty and after-sales support among others. The technical
dealer has to work at providing more integrated services with a reasonable
degree of technical support. The vendor has to help this segment by providing
technical updates, productized services and associated software.

If a clear distinction is made and vendors and channel
partners position themselves accordingly, there is no logical reason that there
will no margins in this industry.

SHYAM MALHOTRA is the Editor-in-Chief of Cyber Media India
Ltd, the publisher of DQ Channels India