The price of disruption

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12 October 2017 | 0

Billy MacInnesThere’s a natural order in the world that we’ve all become accustomed to. So we know that, for the most part, what goes up, must come down. Eventually. That’s why we have phrases like ‘life is full of ups and downs’.

Things are slightly different in the IT world. For the most part, things go down and either stay there or go further down. By ‘things’ I mean prices. We’re accustomed to the price of different components relentlessly decreasing and for those components to be succeeded by better, faster, higher performance replacements, usually at the same price or lower.

This has created its own form of stability that we have all become very used to. And it’s very rare for the pattern of the market to be disrupted. Even if it is, usually through shortages of a particular component that force the price up, the effects are often very short term.

So it’s strange in this ‘disruptive’ industry to see the disruptive effects of a continual price increase that has persisted for much longer than we have come to expect. And it hasn’t gone unremarked.

At the recent Canalys Channels Forum (CCF) in Venice, Dell EMC president and chief commercial officer, highlighted the effects of component price increases over the previous six to nine months. He pointed out that framework deals struck three years ago where channel partners had been very aggressive on price to attract customers were now being disrupted because of the effects of price increases.

Resellers are in a position where customers are viewing renewals through the prism of contractual prices from two to three years ago but they fail to take account of the effect of increases in component prices. And those increases have stretched to the point where it is difficult to mitigate them entirely.

Haas argued that Dell EMC’s breadth of portfolio gave it more leeway to help manage the price and margin effects overall. But he would say that, wouldn’t he?

At the same event, Wilfredo Sotolongo, vice president and general manager, Lenovo DCG EMEA & worldwide global accounts, admitted that it was “hard as hell” for vendors and partners to try to pass the cost increases on to their customers. “We are used to an industry where the costs are dropping every quarter,” he said, “but this time last year, it flipped. Most people expected it to be a six-month problem, but here we are and it’s still a problem.”

Thinking small
It occurs to me that this is one area where it’s probably better to be selling to SMEs and SMBs instead of larger enterprises. Three-year contracts aren’t really that common for many smaller businesses where the arrangements around IT are likely to be more ad hoc. In a market where prices are rising, that’s a good thing because it gives the technology provider a much better opportunity to pass on cost increases to customers.

After all, a small business customer (or consumer for that matter) might bitch that they paid a lower price for an equivalent PC or notebook a few years ago, but they are also far more able to appreciate that prices have increased. Because they are accustomed to paying the price of the technology at the time of purchase, rather than locking themselves into a set price deal for a period of time, they are much more open to the prospect of paying more at a later date if that’s the price demanded for a piece of hardware at that point in time.

On the flip side, they might decide not to buy anything in the hope that the price will come down over time but at least they’re not trying to argue the reseller into making a loss or taking much less margin to keep a deal.

The difficulty with large contracts, however, is that there’s always someone who can be relied on to go lower, even if it means taking a hit in the short term, gambling that prices will come down over time and they’ll be in a better position to make money after that. Ironically, it can sometimes be harder for incumbents in those circumstances because they have become accustomed to a set level of pricing and going lower at a time when prices are rising is more difficult than if you are coming in completely fresh. It can be much harder to adapt if you expect things to come down and they keep going up.

Of course, they will come down again, eventually, but the issue is whether resellers with deal renewals can afford to wait for that to happen.

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