Here’s a phrase I created in the early 1980’s to describe what I clearly saw as the last chance to make high margins on the sale of computer hardware to businesses. In the day of the mainframe and then the minicomputer, margins for manufacturers exceeded 35% and dealers were granted a 35% margin as well. Even with the usual discount of 10%, the margins on hardware were high, especially when applied to prices that exceeded $30,000 per sale.
In the early eighties, IBM helped the PC become a tool of the office, and the product crossed over from use by early adopters to the mass market. Many other PC vendors flooded the market, including an uncounted number of “white box” manufacturers who created systems out of components imported from Asia. New retail channels popped up everywhere, competing for this lucrative, growing business segment. New magazines were rushed to market, thick with advertisements for computer systems and components at bargain prices. Many companies found internal employees able to install these computers and load software easily, without employing outside professional services.
And those of us depending upon the high margins from more expensive minicomputers found ourselves competing with these same PC’s, now growing to be as powerful as the much more complex and expensive computers of just a few years ago.
[Email readers, continue here…] Yet, there was one segment of the PC market that was not only growing but maintaining its margins as well as providing more professional services work than any other segment of the industry. Most of us could install a computer, but almost none of us could network that computer with others in the office or with other offices without equipment we did not understand, configuration tasks we could not perform, and training we could not offer. So we called upon our local value-added reseller with networking experience, often blessed with an earned certification by Novell or Microsoft. We paid high per-hour charges for professional services and unknowingly paid high prices for the networking equipment. But we were, as a class, happy with the fact that the computer and software costs had fallen so much that the networking costs were not an overwhelming portion of the computer budget.
Observing this, when in a planning session one day, I told my staff that we needed to find an area to defend our margins, one that still enjoyed the mantle of mystery to our customer base. Because, I said, “Where there’s mystery, there’s margin.” We did find that niche and used it successfully for several years, in charging to certify and configure a company’s self-purchased PC’s so that they would work efficiently with our software systems. No employee of our customer company could do this because no employee knew our software and its requirements for database setup, multi-user security and more. We were able to add $1,500 or more to each small installation, and much more for large installations even though we no longer sold the PC hardware.
I told this story often in speeches to software and vertical reseller organizations, and the “mystery” expression stuck. Not only that, but I began to hear it restated back to me describing other industries in which similar progress had caused companies to search for a “secret sauce” they could defend.
It was only a small step to incorporate this into the strategic planning sessions for all companies that I later advised or served as a board member. And it still is important today.
I am an investor in a large home service company that specializes only in technology installations and repairs for the home and small business customer. With a fleet of Mini Cooper cars all marked with the distinctive logo and colors of the company, this fleet serves a growing need for fixing computer crashes, infected computers, networking issues, audio-visual installations and even fiber-optic installation in-home for a major phone-bandwidth supplier. They discovered the niche that many home owners and small businesses could not fill or understand.
Can you find a pain point where the customer cannot apply a solution without your help? One where the cost and value are both defensible in maintaining higher margins?
Amazing how it changes the orientation (and the success) of your enterprise when you think first about “What do our clients need” rather than “How can we sell them what we have?”
I had a firsthand experience with this when our clients in the graphic arts industry made a sudden transition from buying services from vendors (typography, camera work, prepress) to thinking they could do it all themselves because now desktop publishing was available. While everyone else thought the sky was falling, this is the end of civilization as we know it, I said, “You know what? They AREN’T going to be able to do it themselves. They’ll need hand-holding, they’ll need site visits, they’ll need support.” So we became consultants, we became in essence a “help desk,” and we had a new revenue stream.
I’d love to be able to say this turned things around for us, but we went out of business anyway due to circumstances totally unrelated to our product line or our customers…
Dave, A very thoughtful piece. I’d like to send it to several of the local retail stores with whom I’ve done busines for years who are now struggling to compete with the big box stores. It’s sad to see their staffs and inventory decline, and sad faces where there always used to be a busy,happy welcome. I’ve often tried to convince them to focus on what their long experience in the business enables them to do what the local WalMart can’t. Two examples are the local camera store and the local nursery. Your way of putting it may help them create their own “secret sauce” and return their business to profitability in a new way uniquely theirs. I know you like to focus on businesses larger than the typical “Mom and Pop”, but some, hopefully,are capable of utilizing the you so clearly stated here.
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