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The Great Office Supplies Caper

Barriers Blocking the Independents Alternative Value Proposition

by Ian M. Elliott | 1/23/19 8:22 AM

We have built a case that there is little opportunity for independent resellers to grow in a shrinking market without improving their value proposition. However, growing in a shrinking market means increasing market share, an objective which is difficult to accomplish without a compelling value proposition that successfully differentiates a business from that of its competitors.

We have explained the importance of closing the technology gap between large and small enterprises, with our usual emphasis on independent resellers in the office products, supplies, and business equipment verticals.

We have introduced the concept of alternative aftermarket replacement cartridges as a viable value proposition while recognizing these alternatives will not always be suitable for everyone.

Now, we will move on to examine the barriers that have historically prevented aftermarket alternatives from gaining a stronger foothold in the marketplace, and the role technology must play to start removing these barriers.

Most businesses have a few, straightforward high-level objectives.

1. Maximize sales revenue

2. Maximize profitability

3. Exceed customer expectations

Sales Revenue:

Within this framework of objectives, the concept of offering aftermarket replacement cartridges introduces some complications because it compromises the natural tendency of a business owner to focus on sales revenue. Selling aftermarket alternatives means generating less revenue because they always sell for less per unit than the higher priced OEM brand cartridges.

Profits:

However, mitigating the reduced sales revenue are the (much) higher margins that can be generated selling aftermarket alternatives compared to original OEM brand cartridges. Bottom line, most business owners who can overcome their natural tendency to focus on the top-line, can then prioritize maximizing profits over sales revenue. If this can be accomplished, then the first hurdle to accepting the role of aftermarket alternatives in the overall value proposition has been overcome.

Customer Expectations:

Next, is the requirement for exceeding customer expectations. Failing in this objective introduces a myriad of issues centering around customer retention. In our digital environment of unlimited alternatives and instant feedback, fulfilling customer expectations cannot be compromised. Historically, the reliability and performance of aftermarket alternatives have been patchy, and the OEM marketing campaigns serve to amplify the risks of off-brand, cheaper alternatives and make consumers wary. Resellers must be confident with regards to the consistency and quality of aftermarket alternatives before they introduce them to their value proposition.

Reducing Customer Spend:

On the flip side of the quality risk, there's the upside of saving customer's money. There's no doubt this aspect of a customer relationship is a significant contributor to overall supplier satisfaction. However, it should not be expected that a customer must be willing to compromise on quality in order to get a lower price.

OEM Power:

We cannot ignore the power of the OEM relationships as a significant component of the barrier preventing greater market penetration of aftermarket alternatives. Many resellers have OEM authorizations that come with certain obligations and restrictions. We must remember, an OEM resale authorization has value for a reseller and the reseller's decision to seek and maintain an authorization is its choice, not the OEMs. It's not unreasonable that the authorization comes with some obligations, such as quarterly and annual sales targets. Clearly, agreeing to sales targets with OEMs that result in authorizations to resell their products, and then aggressively pursuing a conversion strategy to sell aftermarket alternatives, carries the risk of compromising those sales targets. Ultimately, missing sales targets may compromise the status of an authorization which may, in turn, have larger implications for a reseller.

Logistics:

Another formidable barrier confronting the more widespread introduction of aftermarket alternatives are the logistics. We cannot ignore the current difficulties a typical reseller faces when managing its product offering, the pricing, and its daily purchasing optimization decisions.

Pricing Logistics:

The complexity of the pricing logistics cannot be overlooked as a barrier to distribution. A typical office products reseller may have 60,000 or more products in its catalog. Many of these will be items provided by the two national wholesalers, Essendant and SP Richards, both of whom independently provide pricing tools for their individual product catalogs.

Think about the complexity of bringing in products outside of the two wholesaler catalogs, or for that matter, even just choosing between the two catalogs. Think about these problems in the context of a "simple" model we will now explain.

A Simple Model:

[DISCLAIMER: THE COMPANY NAMES AND COST EXAMPLES USED IN THIS EXAMPLE ARE FOR ILLUSTRATIVE PURPOSES ONLY AND ARE NOT REPRESENTATIVE OF A SPECIFIC CARTRIDGE OR SPECIFIC COSTS FROM ANY OF THESE PROVIDERS.]

To illustrate our point, we have selected a fictitious OEM cartridge model that's available from multiple sources such as Essendant, SPR, Arlington, and Supplies Network, and has various aftermarket alternatives available, including Innovera (Essendant) and Elite (SPR), plus other options direct from Clover Imaging Group, Ninestar, and Aster Graphics.

Essendant's pricing model will price the Essendant products including the OEM and Innovera brands. SPR's pricing model will price the SPR products, including the OEM and the Elite brands. Neither of their pricing platforms will price products sourced directly from alternative suppliers. This leaves the reseller to figure out their own pricing on these products which, because of the number of products involved, usually means resorting to cost-plus as illustrated in the charts labeled "current" (left-hand side) below.

Sell Prices - Optimization ModelWhat we see here, in the selling price model, is a cluster of similar prices for the OEM products, and rational market-driven pricing for the Innovera and Elite wholesaler "house-brand" alternatives. The problem develops when trying to add in CIG, Ninestar, and Aster alternatives. In a cost-plus pricing scenario, even with 50 points of margin on the Ninestar and Aster products, the calculated selling price is too low. Equally, for the CIG product, there's no knowing where overall pricing will end up when using a cost-plus approach on a wide range of products. It may work okay (by accident) on some products, but it will be high on some and low on others.

Researching buyer's are filtering their options towards experts in the field. However, it's difficult to earn the position of an expert if you can't even demonstrate the ability to price your products to market.

In our model, a 30-point gross margin calculates the price for the CIG alternative at $60. Perhaps this is under-priced, and the dealer would prefer it to be closer to the price of the Innovera or Elite brands. Unfortunately, though, this outcome is not practical for a reseller to achieve because it requires a time-consuming and error-prone manual process.

Cost - Optimzation ModelIn the cost model above, we can see there are small variations in the cost for the OEM branded product from each of the four suppliers, thereby introducing the problem of deciding which is the optimum supplier to buy the equivalent product from. We also see the costs for the Innovera and Elite aftermarket brands, as well as the costs for direct purchase from CIG, Ninestar, and Aster.

Gross Margin - Optimization ModelFinally, we look at the gross margin model and introduce the "future" charts showing on the right-hand side of the two side-by-side charts. What we've done here is to introduce market pricing for each of the alternatives, a strategy that is designed to eliminate the cost-plus pricing issues that otherwise occur. What you now see is the CIG alternative priced at $65 and the Ninestar and Aster products priced at $50.

The outcome of all this is that the highest gross margin on the OEM cartridge is earned from the Arlington supplied cartridge at $22, and the highest gross margin on an aftermarket alternative (when it's priced to market at $50) is earned on the Aster cartridge at $45.

The overwhelming complexity of the problem should be clear. Without technology analyzing these different options and the use of algorithms to calculate optimal outcomes, it is almost impossible for a reseller to offer the alternative value proposition to its customers.

Purchasing Logistics:

The introduction of aftermarket alternatives should not involve any blind product substitution on customer orders. To comply with the customer satisfaction requirement, the reseller must deliver what the customer orders. To contextualize the complexity of this, think about the following logistics considerations for a non-stocking reseller:

1. Customer orders 10-line items totaling $1,000

2. Nine of the line items come from a wholesaler's catalog and will be delivered to the reseller the next day.

3. Reseller will then deliver the order directly to its customer.

4. The remaining line item (representing $100 of the $1,000 order) is a third-party cartridge that comes from a different supplier.

5. The lead time is 2 days, not the next day. This means holding back 90% of the order to deliver 100% complete or making two deliveries. There are real costs incurred by both the customer and reseller with either option.

6. The saving to the customer in selecting the aftermarket alternative was $50 and the increased profit to the reseller was $75. However, the single order from the third-party supplier carried a $15 freight charge, reducing the margin improvement to $60.

7. It also reduced purchases from the wholesaler that must be accounted for in their growth rebate program as well as the OEMs.

Think about these purchasing complexities in the context of a $5M "non-stocking" office products reseller who may be placing 100 or more orders per day, each of which may contain an average of five, or more, line items. Reviewing these orders in the context of the complexity outlined above cannot be accomplished manually so, there quickly comes a point where the reseller, understandably, concludes it's more trouble than it's worth and is forced to pass on presenting the alternative value proposition to its customers.

It should be clear, there are real and significant barriers that combine to prevent aftermarket alternatives from achieving greater market share. This is despite the fact they can save the reseller's customers' money, as well as earn the reseller's themselves higher margins. However, because sales and profits are the most critical business requirements (especially in a mature, declining market), there should be ample motivation to implement a solution that overcomes these barriers.

Those that utilize technology to help overcome these barriers will stand a better chance of growing their business profitably despite the declining market.

At this stage, we believe we have laid enough groundwork to have illustrated the concept of deploying technology to create a differentiating capability, and that adding aftermarket cartridge alternatives to the value proposition has the potential to help the reseller increase market share as well as improve its profitability.

What next?

What we haven't illustrated yet, is the scope and capabilities of a technology solution necessary for removing the barriers and permitting the resellers to offer a wider range of items, including those from outside the national wholesaler's product catalogs. Products that can be seamlessly incorporated into their value proposition while optimizing the entire catalog for the purpose of maximizing sales and profits.

However, before we move on to conclude this series with an explanation of the necessary scope and capabilities of a technology solution, the next (upcoming) post will be outlining the online strategy and explaining the obstacles currently associated with the reseller's website and social media presence. These online components must play together to help communicate the value proposition, build awareness, and satisfy researching buyers (at various stages of their individual buying journey's) in order for the ultimate technology solution to fulfill its potential.

To learn more about the resellers value proposition, the technology platform, and the importance of developing web traffic, sign-up for our blog to receive automatic notifications as we publish new, directly related content.

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Alternatively, please click the following link for immediate access to the complete eight-part series, "Crafting and Promoting the Resellers Business Strategy" or, to learn more about the full scope of this material, and to access in a downloadable e-Book format, please click the cover image below.

Book 6 - Crafting &amp; Promoting the Resellers Business Strategy

 

Topics: Information Technology, Business Transformation

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