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Setting the Right Margins on Hardware

When a company innovates a new product, its wholesale and retail value is unknown. Pricing that product becomes a lesson in What the Market Will Bear (WTMWB), a strategy for maximizing profitsIt targets the highest price consumers will reasonably pay.

Value-added resellers (VARs) do not have the luxury of adhering to a WTMWB model. They are not exclusive and most reseller programs set pricing ranges to facilitate fair competition. That said, these ranges rarely include the cost of hardware for use with the service. Consequently, some VARs gouge on hardware to open another revenue stream.

Since hardware is not a focus but rather a peripheral, VARs should refrain from jacking prices on their products. More specifically, there are three reasons why hardware should not grow into a profit centre.

  1. Hardware is another competitive arena. If you undersell your services but oversell your hardware to compensate, you risk losing customers to those who derive greater value from the tangible. If you balance the pricing of both offerings, you can gain an edge over competitors teetering one way or another.

  2. Some hardware is purchasable from online outlets at aggressive discounts. The consumer may not recognize the value in buying through their provider if overpriced.

  3. If your services require hardware, you do not want to construct unnecessary adoption barriers with steep pricing.

Demonstrate Your Added-Value

Buying hardware through a service provider comes with various perks. It is paramount that you highlight these benefits to justify your pricing. For example, pitch your support model or service guarantee to win over the lower price.

To illustrate, a VAR selling VoIP services may compete with local electronics stores selling VoIP gear. At the higher price, the VAR can demonstrate its value with free provisioning offers and support. These are the ongoing costs only VARs face and must calculate when setting prices. The relationship with customers is not purely transactional, making margins trickier to set compared to other commerce ventures.

Check for Distribution Recommendations

Your distributors can sometimes recommend profit margins on the hardware you sell based on their own expertise and customer behaviour. While these ranges may change in different markets, they are a starting point for VARs tapping into hardware for the first time.