The Harsh Reality of Hardware Margins - Lessons Learned
Episode 53
As odd as it sounds, hardware markup and margins are a never-ending discussion for IT consultants. Like many, I started out with no idea how to source hardware and software. At least with software, I could find a way to buy it and get it to the client.
I think the two big
questions on hardware are 1) Where do you get it, and 2) How do you make money
with it?
Where Do You Get
Hardware?
I found out about
distributors two ways. First, I asked other consultants. Most were very open
and I soon discovered that there weren’t many distributor to choose from. So I
just had to set up an account and figure out how to get the products I needed.
Second, I looked at the
machines I came across. Back in the old days, a lot of people built their own
machines (myself included. See the “Side Note” below). Inside those machines, a
lot of parts had stickers on them from regional distributors. This made it easy
for a distributor to identify that a questionable piece of equipment came from
them. It also let me know who those distributors were.
Bottom line, finding
hardware wasn’t hard. The hard part was making money on it!
How Do You Make Money on
Hardware Sales?
One of the most common
statements you’ll hear in the channel is some variation of, “You can’t make
money on hardware” or “There’s no margin in hardware.”
That’s simply not true.
If you price things so you don’t make a profit, that’s on you.
When I first started
with a distributor, it became obvious that I wasn’t going to sell enough to get
a good price. My wholesale cost for a printer was more than what the client
would pay at Staples or Best Buy. So I asked around.
The majority of consultants
I talked to worked hard to make 1% - 3% on hardware. That didn’t seem worth
doing to me. A handful claimed to simply double their cost so 50% of the sales
price was profit. I never discovered if that was true, but I suspect you wouldn’t
sell much at that price. So what’s reasonable?
After much trial and
error, I came up with a hardware approach that I still use and recommend. It
has three basic elements.
1. Mark up your actual
cost for hardware by 25%. This means 20% of the sales price is profit. For
example, if your cost is $100, you charge $125. Thus $25 or 20% of the sale price is profit.
In response to your
question, yes, this means I often sold hardware for more than the MSRP and more
than the client could find elsewhere. There’s nothing wrong with this. In fact,
it’s pretty common. If you buy wiper blades or brake pads from the dealership,
you’ll pay more than at Autozone or O’Reilly. And the dealership sells lots of
parts for one simple reason:
2. We sell the right
thing and stand behind it. Clients never have to worry that I’m selling
them the wrong firewall, the wrong workgroup
printer, or the wrong desktop PC. You know what happens when clients go out and
buy their own stuff. You get a mish-mash of assorted junk, often not business
class, and frequently loaded with all kinds of sampleware you have to remove. It’s
not the right equipment and it takes more time to install and maintain.
We are also committed to
only quoting and selling business class equipment with a three-year warranty
(or better). We never sold a single machine with a Celeron processor or an eMachine. Clients could rely on us to only sell the right solution, and that
includes the hardware.
Finally,
3. If clients don’t want
to buy from us, we don’t worry about it. We highly recommend that they allow us
to share a screen and make sure they buy the right equipment out on the open
market. No Windows Home edition. No machines with zero level two cache. No
routers intended for a home network with very little traffic.
We also have a note in
our service agreement that all work has to be done by us. So if the client buys
something, messes up the install, and asks us to fix it, they pay full price.
We also charge for adds, moves, and changes, even if the client’s on managed
service. So the cost of installing junk always costs them money.
We all have horror stories
about hardware. From not making money to fixing clients’ Frankenstein configurations.
These are never low-margin events. And clients either stop asking us to
maintain their thrift store collection of junk or they learn that they pay less
in the long run and get better equipment if they buy what we ask them to buy,
and they buy from us.
Side note: Life is much
better today that it was fifteen or twenty years ago. Back then, most
businesses you went into had collections of home-built machines. When you
opened the case (and we used to open cases a LOT), you never knew what you’d
find. Brand names you’ve never heard of or no brand name at all, so service and support were impossible.
Yes, I learned brand
names of all kings of equipment, but it was obvious that maintaining brand name
business class equipment was easier, more profitable for me, and less expensive
for the client in the long run.
Ultimately, I wanted us to
be consultants, not box-pushers.
Feedback always welcome.
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Episode 53
This Episode is part of
the ongoing Lessons Learned series. For all the information, and an index of
Lessons Learned episodes, go to the Lessons Learned Page.
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