Industry Analysts :Is MPS Killing the Print Industry?

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Industry Analysts :Is MPS Killing the Print Industry?

By Andy Slawetsky, President, Industry Analysts, Inc.
Managed Print Services (MPS ) is everywhere.  Every print manufacturer has a program.  Vendors, branches, dealers and VARs offer it and even big box retail stores like Staples now provide MPS.  It’s spawned an entire industry of solutions and software companies, newsletters, blogs and more.  But has MPS lived up to its hype?  The short answer is “no.”

The notion of MPS on its own seems to make sense.  Use your relationship with your MFP customers to put their printers under contract to increase your monthly clicks.  Manage their print; educate them on costs, economical printing, etc.  How can that be bad?

When MPS took off a few years ago and printer manufacturers began to develop programs to support their dealers, I couldn’t help but wonder how this concept would eventually impact them.  While these programs may differ from one vendor to another, in one way, they’re all exactly the same; put your customer’s MIF, including brands that you don’t sell under one contract and support these competitive devices with non-OEM supplies.  The idea is that eventually the competitive devices will consolidate or be replaced with your brand over the course of the contract.  Brilliant!  Except it wasn’t.

Manufacturers opened a virtual Pandora’s box of problems that are not going away anytime soon.  Dealers quickly realized how much higher the margins were on non-OEM supplies.  The other issue is that they found out that non-OEM supplies worked.  How did this happen?  First, the MPS programs that the printer manufacturers brought to the dealers included an introduction to non-OEM supplies manufacturers so that the dealer could support competitive devices.  It almost seems ridiculous that a printer manufacturer would introduce their dealer to a non-OEM vendor, but that’s what happened.  Assuming a positive experience with the non-OEM supplies in competitive equipment, dealers would naturally wonder how well these supplies worked in their own MFPs and printers.

And despite what we see in some of the skewed and flawed reports out there comparing the reliability of genuine and non-OEM cartridges, if these supplies didn’t work, you wouldn’t be using them and your manufacturers wouldn’t be partnering with these non-OEM manufacturers.  I’m not suggesting that all non-genuine supplies are of the same standard.  There are some really bad ones out there.  But let’s be real; non-OEM supplies offer considerably higher margins and greater profits than non-OEM.

Another thing that dealers did may have caught their printer vendors by surprise.  Many of them started replacing existing printers not with their own brand, but with remanufactured printers and MFPs.  Why did this occur?  Because it was easier to sell a remanufactured HP and the margins are higher on both the hardware and the supplies than with a new product from their primary brand.

So what did MPS accomplish for the manufacturers?

1. Exposed their dealer channel to the non-OEM industry
2. Provided credibility to the non-OEM industry
3. Exposed their dealer channel to the profitability of remanufactured equipment

I’m sure some people reading at this point will point to the multimillion-dollar deals that manufacturers are signing.  In fact, Lexmark just signed one for $20 million last week, Xerox has announced several this year including one with the U.K. government for over $10 million. There is no shortage of big deals.  And dealers offering MPS have grabbed their fair share of MPS contracts at albeit lower price tags.

The very nature of MPS conditions customers to expect cost savings.  While they may not expect 40% reductions each time they sign a contract, they will often go with what they feel is the most cost effective (cheapest) offer.  In the past, contracts were often departmentalized and it wasn’t uncommon for a customer to have no clue what they were paying each month for their of all their copiers and printers. MPS and site surveys have given them a bottom line to work with.

In a typical MPS engagement, your team will use sophisticated software to analyze the customer’s print volume.  This information will be used to determine a cost per page (CPP) that you will then offer that customer based on their actual monthly volume.  The customer knows what they’re printing, they can reroute prints to more cost effective devices and can keep tabs on their TCO.

But what really happens is customers now have a single number to shop around and while you won this deal with razor thin margins, three years down the road someone else is going to walk through that customer’s door and tell them “what are you paying per page?  I’ll beat it.”  And just like that, you’re out.

OK, so maybe you survive that second contract negotiation after making some concessions and reducing your price, possibly by relying on non-OEM toner for your products, which you didn’t have to do under the first contract.  Where do you go from here?  You’re in trouble because the next time that contract comes up the same thing is going to happen.  Not only is it likely someone will undercut you but now your customer is expecting another reduction.  You’re toast.

Another issue that we don’t necessarily consider is the affect all this has on the customer.  They may be spending $50,000/month on printing, but since it’s done departmentally, it’s likely the customer has never seen all of their printing costs on one invoice.  Once they do, they may become overly aggressive in cutting those costs, to the point where they’re actively trying to cut or limit printing.  In the end, the easiest way for them to reduce their costs is to find a vendor that will provide a lower CPP, which means you either lose your margins or lose your customer altogether.

 

We’re already seeing this dynamic at work as margins, while healthy during the initial contract, are lower on subsequent contracts with the same customer.

MPS gross margins are falling and we’ve clearly identified a few of the reasons why already.  But how far will they go?  They’re still better than gross margins for selling a copier or printer on its own.  Incidentally, when we discuss gross margins we’re talking about profit as it relates to the selling price for all three components – hardware, service and supplies.

Source – Annual Dealer Strategies Report, Industry Analysts, Inc.

The chart above shows that MPS gross margins are still better than those found with traditional CPP contracts.  However, while traditional CPP gross margins have held steady over the last four years, MPS gross margins have been falling.  The chart below illustrates projected MPS gross margins should the current rate of decline continue.

Source – Annual Dealer Strategies Report, Industry Analysts, Inc.

According to our research, if MPS margins continue to decline at their current rate, they will be even with gross margins found on traditional CPP contracts by 2016.  By 2020, they will be about 33%, several points lower.

This may be why many dealers are giving up on MPS.  Although the percentage of dealers offering MPS has increased steadily over the last four years (see chart below), we have been surprised by the number of large dealers that have told us they are giving it up.

This may be why many dealers are giving up on MPS.  Although the percentage of dealers offering MPS has increased steadily over the last four years (see chart below), we have been surprised by the number of large dealers that have told us they are giving it up.

Source – Annual Dealer Strategies Report, Industry Analysts, Inc.

At a meeting a while back, Jim D’Emidio, President of Muratec suggested that dealers simply place stickers on competitive printers that said, “call this number for service.”  While it seemed like a joke at the time (it wasn’t), the more I think about it, the more brilliant I think this strategy is.  Let’s play this through.

Instead of pushing a customer to sign a contract encompassing their entire fleet, what if you supported the printers on time and materials (T&M) and fulfilled their supplies requirements as needed (out of box) instead of through a CPP contract?  This will resolve several issues inherent to MPS contracts.

First, since the devices aren’t under a single contract, you’re protected from the competition walking into your account and undercutting you.  In fact, you may find you’re the one doing the undercutting.  When the competition puts all the devices in a single contract, they’ve put a number in front of that customer – one you can beat.

For example, maybe I have 20 MFPs at a customer location and I’m supporting 30 printers through T&M.  My proposal will call out the monthly volume for those 20 MFPs but there will be no cost assigned to the printers even though there’s revenue coming in from the supplies and maintenance for those devices.  On the other hand, my competitor’s proposal will include those devices so my price will be lower because I’m only supporting the 20 MFPs, not 50 devices as they’re recommending.  I tell the customer I’m only servicing the devices and sending toner when they needservice and toner.

One of the biggest issues with MPS is that true cost per page you’re providing.  That magic number you’re giving your customer is what’s killing you.  You’re giving them the ability to shop you and there is always someone who will offer your customer a better deal.  Yes you provide better service.  Yes they’ve been with you for years.  But we have all lost deals on cost.

Under the sticker program, you’re still providing the fleet with service and supplies.  And as those T&M printers need to be replaced, you can replace them with your brand and put them under your contract.  It’s still MPS, but this way, you’re protected from being undercut.  You’re also making it difficult for your customer to come back to you after three years, telling you they want it for less because your price has always gone down.  Even though the new deal may have a few extra MFPs and printers added to it as you replace legacy T&M machines, they should expect to pay a little more since they’re adding more devices to the contract.

This sticker idea isn’t only for SMB customers.  Even the likes of Xerox and HP could benefit from this approach, for all the reasons we discussed.  At the end of the day, the worst thing you can do is to give that customer a flat quote with which to shop you.  That’s why solutions and services have become so critical.  It’s a way to bury the costs as part of a bigger contract.  It’s too hard to create apples to apples comparisons when you include a solution in the deal.  But when it’s just prints, finding someone to give you a lower price is easy.

MPS was supposed to be the saving grace for the print industry.  Instead, it’s killing it.  Vendors are losing millions to non-OEM manufacturers.  MPS margins are steadily falling and within a few years, they may not provide you with enough to cover your costs, let alone earn a profit.  We all wanted MPS to be the silver bullet.  All I can say is be careful what you wish for.

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October 16, 2012 at 8:18 AM