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 user 2005-08-11 at 10:38:00 am Views: 79
  • #12361


    Robert Price
    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
    long-term profitability.”
    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.