The economy is showing signs of relative stability. The stock market is no
longer going through wild swings. Banks are beginning to lend (at least a
little). And the government is no longer talking about economic doomsday
scenarios.
While that all sounds good, it doesn’t mean the recession is over. Analysts
and economists say true economic recovery will not happen for another year, and
even then it will be late 2010 before the average small to midsize business
starts to feel the economic turnaround.
In the Channel
Insider 2009 Market Pulse Report, solution providers said that their
customers were cutting back on IT spending. Many end users were taking longer
to act on IT projects or deferring work to avoid payments. Thirty-eight percent
of surveyed solution providers said that their customers were demanding lower
prices for products and services.
Business-technology consumers remain frugal about their IT investments and
demand the best, most aggressive prices. But that doesn’t mean you have to give
it to them. Supply-side economics, in which higher demand and lower
availability equals higher prices, still applies no matter the economic
climate.
Fortune Editor-at-Large Geoff Colvin offers a simple but effective
formula for determining relative pricing for goods and services. It’s a
two-dimensional grid in which the top is for unique goods and services, the
left flank is for goods that are necessary, the right flank for discretionary
purchases and the bottom for commodity goods.
In his column, Colvin recounts how some businesses use this grid to
determine what goods cannot only withstand current pricing pressures, but also
tolerate pricing increases. If something is both unique and necessary, such as
toothpaste and gasoline, consumers will tolerate a price increase. However, if
something is both commoditized and discretionary, such as common household
appliances and air travel, consumers are less forgiving of price hikes.
For solution providers, this simple formula could provide some much needed
directional guidance on how to price their goods and services. In fact,
Colvin’s grid could give solution providers the ticket to raise their prices.
Consider this: One of the hottest technologies and services opportunities in
the market today is virtualization and IT consolidation. End users are looking
to reduce their data center footprint and the complexity of their IT
infrastructure, while increasing the manageability and efficiency of their IT
assets. According to the Microsoft 2009 SMB Insight Report, virtualization and
IT consolidation are ranked as the best IT cost-saving investments and
technology investments for business growth. If that’s the case, solution
providers should be able to charge top dollar—or at least not waver on their
rates—for virtualization products and consolidation services.
Conversely, investments in office productivity applications, such as
Microsoft Office and Google Apps, are seen as low value to SMBs. Add to that
the fact that you can buy productivity apps from anyone, implementation doesn’t
require tremendous skill and that older versions work well enough that new
versions aren’t necessary, and you’ve got a recipe for cutting prices.
What if something is unique, but discretionary in nature? Solution providers
said in the Market Pulse report that their customers were looking for product
sales and support services for smartphones, such as the iPhone and BlackBerry.
While the devices are relatively high priced, they’re overdistributed. In this
case, pricing should remain relatively flat.
How about unified communications? The number of vendors providing products
and services in unified communications is still relatively small. The number of
solution providers supporting unified communications is limited. But many businesses—especially
those smaller than enterprise—are not looking to consolidate voice, data and
video communications just yet. Therefore, unified communications falls into the
unique but discretionary category.
Ah, but security and storage are imperatives. No one told data that there’s
a recession, so it just keeps growing exponentially. No one told viruses and
hackers that there’s a recession, and the volume and severity of threats is
skyrocketing. Yet, both security and storage, according to the Microsoft SMB
report, are seen as low value for controlling costs and advancing business
interests. Given the general availability of security and storage
solutions—such as anti-virus, firewalls and backup management
applications—these technologies fall into the necessary but commodity category
and likely will feel pricing pressures.
It’s easy to simply capitulate to customer demands for lower prices.
However, it’s hard to raise prices once you’ve lowered them. While Colvin’s
formula is not precise and cannot account for all product pricing, it does
provide some rudimentary guidance for solution providers to respond to customer
demands for “aggressive” discounts and price cuts.
Lawrence M. Walsh is vice president and group publisher of Channel Insider.
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