MORE PROPAGANDA FROM THE OEM’S
MORE PROPAGANDA FROM THE OEM’S
2005-08-11 at 10:38:00 am #12361
(PROPAGANDA FROM THE OEM’S )
was on top of the world. He had struck a deal with an aftermarket toner cartridge manufacturer that promised to grow
Price Office Supply’s bottom line. Price quickly added the lower-cost
remanufactured supplies to his product line. The cheap supplies were sure to
drive in customers, and the higher margins meant his company would pocket more
profits on every cartridge sold. It just made good business sense.
did it? It didn’t take long for Price’s excitement to turn to regret as he
watched his printing supplies business decline. Cartridge returns were up,
inventory turns were down. Staff selling time and customer support costs were
skyrocketing. His most loyal customers had not been seen in months. Shopping
carts that once overflowed with cartridges, paper, binders and file folders were
now nearly empty.
How did this happen to our hypothetical supplies
reseller? Like many, Mr Price was tripped up by a shortsighted view of
It’s easy to focus on higher margins as a quick, tangible
measure of profitability. For example: Cartridge A sells for $40 with a 32 per
cent gross margin; Cartridge B sells for $35 with a 45 per cent gross margin. At
first glance, Cartridge B appears to be more profitable. Unfortunately, it’s not
that cut and dried. Simple gross margin percentages don’t tell the whole story.
In reality, many factors affect profitability.
Hidden costs, such as
those associated with poor quality and reliability, drive down profit, drive up
support costs and ultimately can drain a business of its most valuable asset:
repeat customers. Initial gross margins quickly erode when poor-quality
cartridges return to your store and repeat customers don’t.
substitute for quality
Original equipment manufacturers (OEMs), by
investing heavily in their technology and products, create loyal customers.
“Original equipment manufacturers go to great lengths to ensure their
products perform optimally for customers,” says Steve Sakumoto, HP vice
president, US supplies sales organisation. “There’s a reason companies like HP
engineer complete printing systems together. Every component in the system – the
printer, the printheads, the ink or toner and
the paper – has a vital role to play in ensuring optimum performance and
reliability. Because of inconsistent remanufacturing processes, you can’t
introduce a non-original cartridge that has been taken apart, refilled with
generic toner and then put back together,
without posing some risk to the integrity of the printing system.”
Research by one of the world’s largest quality assurance organisations,
QualityLogic Inc, proves remanufactured cartridges don’t match the quality and
reliability of original supplies. The 2003 study found that, on average, genuine
HP cartridges were significantly more reliable and consistent than the leading
worldwide remanufactured brands tested. A same-year study by Lyra Research shows
a similar trend in colour toner, finding that
96 per cent of US HP Color LaserJet users who tried non-original toner reported printing problems.
and reliability are the cornerstones for building customer loyalty. Customers
expect their printers to work and their images to be perfect every time. That’s
why OEMs invest so heavily in printing and imaging technology – it’s what makes
original supplies consistently deliver the best results for customers,” says
Churning customers, burning profits
When a product
fails to meet a customer’s expectations, your relationship with that customer
suffers along with the long-term profitability of your business. If you’re
lucky, the customer might return the failed product to your store, which gives
you a chance to retain their business. That, of course, comes with substantial
costs for your company: staff training and resources to handle the return,
product replacement costs, inventory management costs and so on.
the cost is much higher if a dissatisfied customer stays away. Studies have
shown that it can cost 12 times as much to acquire a new customer than keep an
existing one. And, while a satisfied customer, on average, will tell five people
about his good treatment, nearly twice as many will tell others about poor
service. If an unhappy customer decides to shop elsewhere (and potentially takes
a friend or two with him), you are forced to constantly seek out replacement
Using lower-priced alternatives to drive store traffic does
something else to your bottom line. It attracts switchers – customers who chase
the lowest price around town. These price-sensitive deal hunters have little
brand or vendor loyalty, generating less value and lasting return for your
business. You’ll see greater returns if you keep customers away from the price
“There is a certain percentage of customers who will always shop
on price, and will never be brand loyal,” says Sakumoto. “But there are a huge
number of customers who are brand loyal. Provided they are treated well, these
customers will remain loyal – to brands and to vendors – for a long period of
time. That’s where leveraging the power of a strong brand really helps drive
Brand equity builds profits
high-quality original supplies attract loyal customers who ask for them by name
and are willing to pay for a premium product. And since printing supplies are
destination purchases, they create more opportunities to sell. For example, a
2003 Gartner study found that HP ink buyers are 70 per cent more likely to
purchase two or more cartridges at one time than those buying non-original ink.
Sales are not limited to printing supplies. Resellers report original
supplies drive a larger total market basket than alternative aftermarket
supplies. In fact, one reseller reports an average 28 per cent higher revenue
from its customers who purchase HP ink cartridges than those purchasing
non-original supplies. Another study showed that 80 per cent of customers buying
genuine HP supplies not only purchased more HP cartridges, but also bought a
larger number of other office supply products.
“Obviously, any time you
can give customers a reason to come to you, such as buying replacement ink or
toner, you have the opportunity to solidify
your relationship with that customer,” says Sakumoto. “If they are satisfied
with the service they receive, which includes the quality and reliability of the
products they buy, they will repeatedly give you their business.”
Broaden your vision and cumulative profits
It’s not hard
to find the true measure of profitability, but it does take a shift in
perspective. You can’t ignore the sometimes hidden, but real, costs that erode
margins, such as slower inventory turns and increased failure rates. Higher
margins quickly become irrelevant when the products don’t move or get returned
because of poor quality.
Non-original supplies take longer to sell than
name-brand original supplies, which drives up selling costs and reduces annual
inventory turns. Inventories of original supplies often turn more than twice as
fast as remanufactured cartridge inventories, returning revenue to you quicker.
And it’s revenue that grows. In contrast, the higher failure rates of
remanufactured supplies lead to increased support costs, higher return rates
and, perhaps most importantly, lost repeat and referral business.
you broaden your perspective beyond the short-term profit gains of non-original
supplies, you’ll find the true path to profitability. High-quality, reliable
original supplies generate more satisfied, loyal customers and consistent,
cumulative profits that grow over time.