The Harsh Reality of Hardware Margins

 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?

Like many others, I started out by going to the places I shopped and asking if they had a wholesale program so that I could buy from them, mark it up, and still provide a decent price to the client. But that quickly became a very limiting strategy. *I* shopped at normal stores. They don’t sell high-end printers, real servers, or bulk deliveries of hard drives.

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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