How to sell peripherals - part 3

The vagaries of the small and medium-sized enterprise (SME) sector - always a difficult area to address - are becoming more pronounced with the rise of the internet and the subsequent pressure it has put on pricing. This is particularly true in the volatile peripherals market.

Peripheral technology involves the capture, storage and presentation of information that is the lifeblood of any company. The rise of technologies such as Linux confirm what analysts have been saying for years about users not caring about the underlying technology, in this case the operating system.

The arena of peripheral technology is where the digital world meets the real world. Here, speed to market, product availability and a broad portfolio of easy-to-use products are most important.

So far this year, distributors are reporting a buoyant first quarter followed by a poor April. The year 2000 rush accounted for this, but distributors are finding it hard to explain the early summer slowdown. Sales are starting to pick up again, however.

When selling to small businesses the first thing to remember is that they are unlikely to know what they want, but they probably know how much they want to pay for it.

This is especially true in the peripherals market - a sector where smaller firms have always defined peripherals as 'added extras'. But this is changing for a number of reasons.

Nick Tomey, supplies manager at Ingram Micro, says: "SME resellers have woken up to the fact that there is money to be made from shipping low-end products and from expanding their product portfolios. For example, SME resellers traditionally would have let SME users buy their consumables from retailers, but they are now waking up to the fact there is more money to be made from consumables than from hardware."

This means taking ownership of as much of the customer's business as possible. On the customer side, the battle for mindshare is being won, and smaller companies are realising that technologies are open to them. The old story of everyone being the same size on the internet is also driving the market for back-up technology in areas such as digital imaging. As ever, the internet is a double-edged sword.

Eddie Moore, business development manager at Ideal Hardware, says the video capture market is booming because even small companies want to jazz up their websites.

The price is not always right
While smaller firms now accept the necessity of investing in infrastructure and upgrading their existing kit, the stumbling block for resellers is price. And the reality is that there is not a lot of service revenue in a digital camera.

In the peripherals market, the subject of price is where most of the debate takes place. It is here, at the lower end, that people want more for their money, and customer loyalty is an unknown concept.

The good news is that the technologies will just keep on coming. The rise of the digital camera as a household item and a business necessity, and the increasing spread of kit such as high-resolution scanners and photo-quality printers will continue to drive the market.

"Combination drives are filling the hole left by the shortfall in CD-RW drives and the lack of DVD drives," says Moore. "The price points are starting to look good, so the combo drives are making an impact. Other areas in the vertical space are security - which is on everyone's lips at the moment - and alongside that we see a lot of interest in biometrics, such as fingerprint readers."

The problem is the downward pressure on the price of these items. The more popular the product, the lower the price.

The peripherals market is very popular. According to market researcher IDC, 1999 was a breakthrough year in the digital camera market. It predicts that this strong growth will continue, and the worldwide value of this market will exceed $4.3bn (£2.9bn) in 2000, despite plummeting prices. That corresponds to a huge number of products being shifted.

Distributors say that prices are starting to drop to a level that will encourage people to think about investing considerable amounts in the peripherals market.

However, the downward pressure on price at the sharp end is being pushed to the limit. But in the small office market, online warehouses such as Jungle.com are picking up a lot of business.

While dotcoms drive down prices, resellers are unlikely to get much sympathy from distributors, who simply roll out the services mantra: "Resellers cannot expect to survive on the margins provided by product sales alone."

Although there is a lot to be cynical about when manufacturers and distributors start talking about services, there is also a lot of sense spoken about locality, expertise and relationships. To exploit relationships means having the expanded product portfolio and ensuring that your logistics set-up can ship the product profitably.

"Twelve to 18 months ago people were sticking to smaller-focused product portfolios," says Tomey. "But today, smaller resellers are realising they can make money from a digital camera. This is because of a number of factors. The add-on services that people used to buy, they now expect for free, especially at the low end of the market, and resellers realise that a lot of repeat business for low-value goods such as consumables, inkjet cartridges, toner and disks adds up to a lot of money."

But the eternal catch-22 situation remains: margins must outweigh the investments in training, pre- and post-sales service and logistics.

Fighting it out
Alongside the new and infant peripherals markets, such as cameras and projectors, the traditional peripherals market remains as competitive as ever, with companies changing tack and attacking each other.

Adrian Studd, business manager for Kyocera and Tally at Computer 2000, says that while the peripherals market proved a tough playground early this year, things are now improving.

"The convergence of technologies, with digital colour coming a lot more to the fore, is seeing a lot of investments," he says. "Now manufacturers are getting the price points right, a digital camera is now reasonably priced at last and businesses are happier to invest in photo-quality printing."

Studd also sees a lot more competition in the printing and copier market. Hewlett Packard (HP) and Kyocera are going to become a lot more focused on copiers, attacking Xerox, which in turn is trying to shake off its 'big footprint' image. These companies are going to be fighting it out in the small business sector as well as at the top end.

"HP is on a charge," says Tomey. "For a change it appears to have done several things right at the same time. It is also being helped by Epson, whose product line is not up to scratch at the moment."

Chris Bard, strategic marketing manager at Xerox UK's office printing division, adds: "There are more PCs on more desks than ever before, and it is in the 'wrap-around' products that there is more and more money to be made. Our image is of a company that for a long time made clever but staid products. With the rise of the digital world moving into the small end with more products at the mid-range, pushing colour laser is the next big thing."

Colour laser may well be the next big money spinner in this market, but Bard also accepts that people want value for money. "More for less is the call we are getting, but people want almost twice as much for less," he says. "There is a lot of technology to come in this space this year. SMEs are looking to invest a lot in this and manufacturers are responding."

A market all of its own
The peripherals sector is fast becoming a market in its own right. No longer driven solely by sales of PC hardware, even desktop peripherals are driving enough business by themselves to be considered a single market. Among all the digital products has been the fax machine, as multi-function desktops become a fashionable item once again and several products are due out later this year.

But the market for peripherals does, for the moment, remain inextricably linked to that for PCs. This should be good news for peripheral sales, because PC sales in Europe jumped by 18 per cent last year. Research analyst Dataquest estimates that 29.9 million PCs were sold in Europe in 1999, with the home PC market growing by 32 per cent year on year.

These figures show that small office and home office users are demanding more from their technology investments and have accepted the continuing nature of those investments.

As for competition, online resellers are seen as one of the biggest threats, but that can be countered. Everyone is moving into everyone else's space. It is an exciting time as companies challenge each other on the product and services front.

The successful format for managing an SME base seems to encompass a willingness to ship more and more products while offering streamlined services. Services such as maintenance can be offered over email. "For a lot of smaller guys, email is the stepping stone to real ecommerce, and use of that interface is growing among the smaller guys," says Bard.

While distributors have yet to feel the pressure of the rise of online warehouses such as Jungle.com, resellers are starting to. Off-the-page reseller DabsDirect, for example, is feeling the pressure so much that it is planning to float on the stock market.

So the choice is one of tackling prices head-on and going head-to-head with the online box shifters, which, despite all the hype, continue to be dogged by accusations of poor logistics, missed delivery times and all the complaints traditionally levelled at resellers.

Moore says the great advantage that resellers have is that they can apply how they do business with distributors to their own customers. "People like to haggle and you can't haggle with a computer," he says. "At Ideal, this is the model that works best. People like to pick up the telephone and haggle over price."

The net effect
Despite the rise of the onliners, the web remains the greatest business driver ever seen in the SME and peripherals markets. The amount of storage within an organisation is doubling every six months, according to some estimates, and this growth is accelerating. The web is the reason for a greater chunk of investment than anything that has preceded it.

The next big wave to hit will be in the ebusiness space. By the third quarter of this year market analyst Gartner estimates that 66 per cent of all IT spend will be on ebusiness projects.

While this sounds like it will be all software-based, the reality is that in the small enterprise sector, setting up an ebusiness strategy will mean investing heavily in the kit to make it possible. So start bundling those ebusiness start-up packs now.

Prices will continue to fall as the number of manufacturers entering or expanding into the peripherals market grows. But the good news is that expanding markets will outweigh the effects of declining margins.

The spectre of business to business (B2B) haunts the channel, and if you are in the assembly business you should keep a close eye on the B2B exchanges being discussed by the big PC vendors.

While it is fair to say that the Computacenters of this world will be the first beneficiaries of these new marketplaces, they will be another string to the bow of the reseller. It will be a while before smaller firms start buying and selling IT parts online, but resellers should be able to take advantage of the opportunities to drive down costs.

The predicted growth of sales will be achieved only if manufacturers can keep up with demand. So far this year, DVD drives have been in short supply and the shortage is expected to last until the end of the third quarter.

The end of the third quarter means that Christmas is just around the corner. As one channel player puts it: "Every year at Christmas demand for peripherals outstrips supply by a huge margin. You just can't get enough."

'Less is more' was a famous tag line for a well-known brand of lager a few years ago. In the case of the channel, less means lower value and more means holding more stock.

Conclusions

• The question of price is a key issue in the peripherals market as smaller firms are prepared to shop around for the lowest price instead of staying loyal to their usual reseller. Resellers therefore have to be prepared to sell a lot more for a lot less.
• Although margins are constantly under pressure, a steady stream of new products and the large volumes of goods moved ensures the peripherals market remains robust. IDC estimates that the market will exceed $2.9bn this year, despite plummeting prices.
• While it is fast becoming a market in its own right, peripherals are still tightly linked to the PC market. This is good news for resellers, as computer sales in western Europe are expected to be healthy for the next five years.