Growing profitability

Robert Price was on top of the world. He had struck a deal with an aftermarket toner cartridge manufacturer that promised to grow Price Office Supply’s bottom line. Price quickly added the lower-cost remanufactured supplies to his product line. The cheap supplies were sure to drive in customers, and the higher margins meant his company would pocket more profits on every cartridge sold. It just made good business sense.

Or did it? It didn’t take long for Price’s excitement to turn to regret as he watched his printing supplies business decline. Cartridge returns were up, inventory turns were down. Staff selling time and customer support costs were skyrocketing. His most loyal customers had not been seen in months. Shopping carts that once overflowed with cartridges, paper, binders and file folders were now nearly empty.

How did this happen to our hypothetical supplies reseller? Like many, Mr Price was tripped up by a shortsighted view of profitability.

It’s easy to focus on higher margins as a quick, tangible measure of profitability. For example: Cartridge A sells for $40 with a 32 per cent gross margin; Cartridge B sells for $35 with a 45 per cent gross margin. At first glance, Cartridge B appears to be more profitable. Unfortunately, it’s not that cut and dried. Simple gross margin percentages don’t tell the whole story. In reality, many factors affect profitability.

Hidden costs, such as those associated with poor quality and reliability, drive down profit, drive up support costs and ultimately can drain a business of its most valuable asset: repeat customers. Initial gross margins quickly erode when poor-quality cartridges return to your store and repeat customers don’t.

No substitute for quality

Original equipment manufacturers (OEMs), by investing heavily in their technology and products, create loyal customers.

"Original equipment manufacturers go to great lengths to ensure their products perform optimally for customers," says Steve Sakumoto, HP vice president, US supplies sales organisation. "There’s a reason companies like HP engineer complete printing systems together. Every component in the system – the printer, the printheads, the ink or toner and the paper – has a vital role to play in ensuring optimum performance and reliability. Because of inconsistent remanufacturing processes, you can’t introduce a non-original cartridge that has been taken apart, refilled with generic toner and then put back together, without posing some risk to the integrity of the printing system."

Research by one of the world’s largest quality assurance organisations, QualityLogic Inc, proves remanufactured cartridges don’t match the quality and reliability of original supplies. The 2003 study found that, on average, genuine HP cartridges were significantly more reliable and consistent than the leading worldwide remanufactured brands tested. A same-year study by Lyra Research shows a similar trend in colour toner, finding that 96 per cent of US HP Color LaserJet users who tried non-original toner reported printing problems.

"Quality and reliability are the cornerstones for building customer loyalty. Customers expect their printers to work and their images to be perfect every time. That’s why OEMs invest so heavily in printing and imaging technology – it’s what makes original supplies consistently deliver the best results for customers," says Sakumoto.

Churning customers, burning profits

When a product fails to meet a customer’s expectations, your relationship with that customer suffers along with the long-term profitability of your business. If you’re lucky, the customer might return the failed product to your store, which gives you a chance to retain their business. That, of course, comes with substantial costs for your company: staff training and resources to handle the return, product replacement costs, inventory management costs and so on.

Still, the cost is much higher if a dissatisfied customer stays away. Studies have shown that it can cost 12 times as much to acquire a new customer than keep an existing one. And, while a satisfied customer, on average, will tell five people about his good treatment, nearly twice as many will tell others about poor service. If an unhappy customer decides to shop elsewhere (and potentially takes a friend or two with him), you are forced to constantly seek out replacement customers.

Using lower-priced alternatives to drive store traffic does something else to your bottom line. It attracts switchers – customers who chase the lowest price around town. These price-sensitive deal hunters have little brand or vendor loyalty, generating less value and lasting return for your business. You’ll see greater returns if you keep customers away from the price path.

"There is a certain percentage of customers who will always shop on price, and will never be brand loyal," says Sakumoto. "But there are a huge number of customers who are brand loyal. Provided they are treated well, these customers will remain loyal – to brands and to vendors – for a long period of time. That’s where leveraging the power of a strong brand really helps drive long-term profitability."

Brand equity builds profits

Reliable, high-quality original supplies attract loyal customers who ask for them by name and are willing to pay for a premium product. And since printing supplies are destination purchases, they create more opportunities to sell. For example, a 2003 Gartner study found that HP ink buyers are 70 per cent more likely to purchase two or more cartridges at one time than those buying non-original ink.

Sales are not limited to printing supplies. Resellers report original supplies drive a larger total market basket than alternative aftermarket supplies. In fact, one reseller reports an average 28 per cent higher revenue from its customers who purchase HP ink cartridges than those purchasing non-original supplies. Another study showed that 80 per cent of customers buying genuine HP supplies not only purchased more HP cartridges, but also bought a larger number of other office supply products.

"Obviously, any time you can give customers a reason to come to you, such as buying replacement ink or toner, you have the opportunity to solidify your relationship with that customer," says Sakumoto. "If they are satisfied with the service they receive, which includes the quality and reliability of the products they buy, they will repeatedly give you their business."

Broaden your vision and

cumulative profits

It’s not hard to find the true measure of profitability, but it does take a shift in perspective. You can’t ignore the sometimes hidden, but real, costs that erode margins, such as slower inventory turns and increased failure rates. Higher margins quickly become irrelevant when the products don’t move or get returned because of poor quality.

Non-original supplies take longer to sell than name-brand original supplies, which drives up selling costs and reduces annual inventory turns. Inventories of original supplies often turn more than twice as fast as remanufactured cartridge inventories, returning revenue to you quicker. And it’s revenue that grows. In contrast, the higher failure rates of remanufactured supplies lead to increased support costs, higher return rates and, perhaps most importantly, lost repeat and referral business.

When you broaden your perspective beyond the short-term profit gains of non-original supplies, you’ll find the true path to profitability. High-quality, reliable original supplies generate more satisfied, loyal customers and consistent, cumulative profits that grow over time.