Tuesday, July 01, 2008

Pricing: Don't Settle for 1%

How do you determine your pricing?

A few months ago, at the XChange event in L.A., I had a discussion with about a dozen friends/strangers on an executive board.

They were asking "How can you charge that much?" and I answered: Because this is America, and I can do whatever I want.

As far as I can figure it out, there are three ways to determine what you will charge for hardware, software, and materials.

First, you can set a standard percentage you need to make in order to make it worth your while to be selling this stuff.

Second, you can look at the MSRP (Manufacturer's Suggested Retail Price)and figure out how to be as close to that as possible.

Third, you can scour the Internet looking for the lowest price in the history of the world -- and match it.

Uhhh . . .

Errrrr . . .

Wait.

Number Three is stupid. Let's not do that.

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When a client asks us for a quote, we do an average of 30 minutes of work to produce a quote. We don't charge for that. But, in reality, the value is about $75 -- half an hour's labor.

So when a client comes back to us and says "We saw this on pricegrabber for seven cents cheaper," our response is:

Go buy from that other source.

Really.

The last time we did this was . . . Last week.

Here's the big picture: We're not in the business of selling hardware. We're not in the business of selling software. We're not in the business of selling cables. We sell exactly the right thing that the client needs, at the right time. Any variance from that is . . . not exactly the right thing the client needs at the right time.

For Example, let's say a client needs three thin clients and a windows desktop. We quote them something (HP all the way, with enough juice to last three or four years). The client says "pooh-pooh" and buys someotherpieceofcrap on the internet for $100 less.

When the junk shows up, the thin clients are under-powered, the desktop has no office software, the monitor is cracked, and the whole lot has a 90 day warranty.

We charge the client to RMA the broken junk. Now their savings has been flushed down the toilet.

Lesson: We sell the right thing every time. Everything has a 3-year warranty. If it's not right, we take it back at no additional cost.

Over time, the client learns that it is cheaper to "pay a little more" with KPE because it's cheaper in the long run. Every single time a client has "saved money" with some junk they found on the Internet, they paid more in the long run.

And what if the client wants us to scour the internet looking for junk? We charge our regular rate for that. After all, it will take time that we could be selling to someone else. And, in the end, time is one of the things we sell.

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So, if you don't troll the Internet for blue light specials, that leaves two options: Try to match the MSRP or set a standard markup.

MSRP is tough to match, especially when you're small.

I remember when I first set up an account with Ingram. I went to buy a printer. My cost was five dollars below MSRP -- on a $1,200 printer. It was cheaper for me to buy it at Staples. Of course that's why people head down the road of buying this stuff from sources other than the channel.

Even now, many manufacturers set prices so they are 2-3% below MSRP. Occasionally a vendor will brag that you can earn seven percent on their equipment.

But we can't afford to earn 7%. When you sell a good amount of hardware and software, you learn that "stuff happens." A box shows up dented. A client changes their mind. You have to RMA a thing here and a thing there.

There is overhead to selling hardware and software. And if you're not charging your labor rate for this work, you need to make money somehow.

We've discovered over time that we need to make 20-25% on hardware and software to make it worthwhile to be in the business.

If we have a client who orders regularly and doesn't return things, we start rounding down. After all, if they make it easy on us, and eliminate the returns, then we can make money with a smaller percentage.

I've talked to some consultants who mark up everything 50% or even 100%. As a rule, they don't sell a lot of stuff.

If you ask "How can you do that?" the answer is simple. You just do it.

If the client says that it's too much and they can get it cheaper on the Internet, then either they need to go shop on the Internet, or they need to pay you to shop in the Internet. As a rule, if you're not directly involved in the process, they are likely to buy cheap stuff, the wrong stuff, or refurbished stuff.

It doesn't matter how much you sell: you can't beat Best Buy or Walmart on most prices. Don't try.

You need to charge what you need to charge in order to make it worthwhile to be in the business.

And you need to stop caring about whether the client buys from you. If they're going to jerk you around on prices, make you spend time quoting and requoting, and then not pay you for your time, then you should not be selling equipment to them!

It's a simple rule of business: You need to charge enough to make it worth your while.

Interestingly enough, we find that we are cheaper on a lot of the small stuff. For example, we might buy a CAT6 cable for $5 and sell it for $5.99. Fry's will sell the same cable for $20 and Staples will sell it for $30.

We just apply our standard markup.

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Two last notes on process: Get a signed quote/purchase order and get prepayment.

Clients are human. They forget things; they get excited about things; they change their minds. If you're in business for very long, you'll have the experience of having a client say "Yes. Absolutely. Get that as fast as possible." and then cancel the request a week later.

We try to have a limit on what clients can order without an official purchase order. For everything else, we quote the product and ask them to fax the signed quote back to us. Once we get the signed quote, we invoice the client.

After they pay the invoice, we order the product. Obviously, the fastest way to get all this done is with a credit card.

It has always confused me that consultants don't get prepaid for hardware and software. Are you the bank? (No, you're not the bank.)

If the client buys online, they'll put in a credit card and wait for the goods. Why should you extend credit to them?

Eventually, even your best clients will have a change of heart, change of mind, or change of circumstances. So, for example, they might change their mind after approving the quote, after you order the equipment, and before they've paid for it. You might have policies about refunds and restocking fees. But the whole thing just went from profitable to unprofitable (or break even).

Prepayment should be the norm. Just do it.

5 comments:

  1. Absolutely spot on...

    We do exactly the same the thing for the reasons you say!

    You've just explained it better than i usually do though

    :-)

    ReplyDelete
  2. Karl, great points my friend, that is why you are a SMB Dream Team member.

    The question is what do you value your time at? Mine is about $350.00 per hour, this means I need to make this in PROFIT to show value to our company.

    I do sell DELL system, margins are awesome and we are doing very well with our DELL relationship. You can do the same with HP.

    We sell cables for $1 a foot...it is easy to do the math. With gas at a $1.33 a litre in Canada, $1 a foot is a pretty good trade for getting in your car and getting them. We do well on the 25 and 50 footers.

    We usually will hit around 22 points average margin each month which isn't all that bad. I have an awesome purchaser and inside sales...oh yeah, she costs money as well, so add that to the total.

    It is all about the overall solution and not about selling an individual product to the lowest bidder.

    Cheers

    Stuart Crawford
    Calgary, AB
    http://www.stuartcrawford.com

    ReplyDelete
  3. feetsdr5:02 AM

    Karl - I'm working on a long list of comments / questions for the MS in a month book, but I'll start with this blog. You say 3 year warrantee - does that include your labor? If so, do you get reimbursed by HP / other vendors? I remember the Dell capacitor issue (Optiplex machines would fail prematurely because of a bad batch of capacitors. Dell shrugged off the problem as being widespread). If I supply part X (I am thinking Dell, but it applies elsewhere), and it has that 3 year warrantee from the vendor, then they can call for warrantee coverage from the vendor or I can (billing for my time), call for warrantee coverage. Right?

    And what's the facination with 3 year warrantees? If I buy 5 - 10 PCs with 1 year warrantees, I can self insure with the savings rather than a 3 year warrantee?

    ReplyDelete
  4. "If you're in business for very long, you'll have the experience of having a client say "Yes. Absolutely. Get that as fast as possible." and then cancel the request a week later."

    I wouldn't ever do this to somebody. I had somebody do this to me and I fired him and his wife on the spot. My "A" clients would find a use for it rather than be a total ass.

    Conversely if we recommend something and it doesn't work we don't charge. Yummy!

    ReplyDelete
  5. Anonymous11:43 AM

    feetsdr: Assuming they're on a 3 year replacement system, then their machines are *always* covered by a manufacturers warranty.

    Self-insurance on OEM boxes is bad because parts are often customized, which means replacements must be bought from the OEM, and they charge insane markups on these. This is 100% worse on laptops/notebooks. There's also your labor, which is generally higher than the cheapest-guy-in-town they find to do warranty work. And, finally, the liability/blame game.

    Whiteboxes and their manufacturer warranties are better, but you have to have spares on hand while you wait for the RMA to return. (With the exception of Intel CPUs and MBs. Because Intel kicks ass.) There's still the liability/blame game, and your labor costs.

    Basically though, do your own TCA/TCO analysis.

    ReplyDelete

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