Product Sales Still Tied to Profitability

Everywhere you go in the channel you hear people lament the lack of profitability derived from actually selling products. As a result, everybody knows that companies are going to live or die by the number of high-margin services they can wrap around the products.

The only problem with that model is that the vendors are working from the same equation. Squeezed on product margins, they too have increasingly rolled out more services that in many instances compete with the services traditionally offered by solution providers.

Distributors, as noted during Tech Data President Ken Lamneck’s opening keynote address at the Ziff Davis Enterprise Channel Virtual Tradeshow, are trying to mediate this growing conflict by providing a vehicle through which vendors can sell their services through the channel. This essentially creates a dynamic where solution providers must decide where they need to invest to develop their own services versus opting to resell a service from a vendor. If they take the latter road, they can opt to invest the money it would have taken to develop their own equivalent service somewhere else in the business.

But for all the talk about the lack of profitability around product sales, to dismiss product sales as irrelevant would be shortsighted on two different levels. The first and probably most overlooked space where product sales are very profitable is in any area being driven by emerging technologies such as unified communications or storage virtualization. Because these products have yet to enter the commodity stage, there is still a lot of margin to be made from selling them. In fact, the next Ziff Davis Enterprise Channel Summit in New York will focus squarely on identifying the emerging technologies that are driving profits in the channel.

The second area where product sales are still relevant involves the whole issue of account control. Whoever sells the product stands a pretty good chance of picking up additional services business. So if a solution provider opts to not sell products at all in favor of a services-only business model, there is a good chance it might find rivals picking up services market share on the back of product sales.

Like all things in business the key to success is striking the right balance between extremes. Some products, such as servers, basically need to be sold just to get the business. Other emerging technology products can provide healthy margins, but there is a fine line between emerging technologies and cutting-edge technologies that don’t yet have a real market. In either case, what products you choose to sell must always be considered in light of the downstream services revenue they engender.

So at the end of the day, the key question solution providers need to ask themselves is how strategic is any given product to their services business. If the answer is "not very," then chances are the product is more trouble than it’s worth.