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November 2008 | Volume 11/ Number 11
The Channel Perspective

The Big Squeeze “As Margins Shrink”

The Channel is evolving fast and margins are disappearing just as fast. Before you select products to promote to your customers, investigate the vendor, product, channel and pricing strategy to make sure the margins will be there in the future and for the “BIG” opportunities.

Check out the Vendor.

Over the last couple of years, there have been VoIP vendors popping up like crazy. Some have used the open source design and are just offering product at lower price. This holds true for boards, ATAs and phones. If the vendor is based outside the United States, it is very important that they have local offices and local support. If they have only been in business a few years, be suspicious. A good sanity check is to check in with the engineers at a technology site that uses the component you are investigating. They will generally provide the pros and cons of the various products and vendors.

Look for Quality in products

One will find that a well thought out product line will have a consistent architecture. The boards will have a common, easy-to-use API and tools. The design will use the latest chip technology with some vendor specific chips. The performance of the board will meet or exceed the performance of the competition. A five year warranty will give you an idea of the vendor’s confidence in the technology. A lifetime warranty will give your customers the confidence that you and the vendor stand behind the product.

What is the vendors channel strategy?

If the vendor has one channel and pricing strategy for Media Service Providers (MSP) and another for resellers, there is a good chance that the margins will not be maintained and you will lose some deals due to cross channel conflict. Make sure that the vendor has a very well-defined channel. If the vendor sells direct, be very careful of the long-term effects. They may sell to you until the big opportunity comes along and then take it direct. If a vendor sells through distribution, they should have several wellestablished distributors you can purchase from in different parts of the country. If they sell through resellers only, then you should expect to receive leads on a regular basis.

If the vendor’s channel is not well-defined it will have an effect on pricing. Buyers will figure out how to work the channel and get the best price reducing the margin.

Vendor Channel Chart

Distribution Resellers Direct Score
Yes No No High
Yes Yes No Medium
Yes Yes Yes Low
Yes No Yes Low
No Yes No High
No Yes Yes Medium
No No Yes Low

What is the vendor’s pricing Strategy?

If the vendor prices product by volume, the vendor has no channel strategy. They may say that Distributors and Resellers have different volume pricing. Unfortunately, the vendor will sell to anyone as long as the customer will be able to order a specified quantity and pay for the product. For a strong channel strategy, the vendor will have distribution pricing and suggested reseller prices. They will require that the distributors only sell to resellers. Distributors will set their own prices to their resellers.

On-Line Merchant Stores

If the vendor’s products are sold through online merchant stores, there is a very good chance that the margins are being squeezed hard. For example, if the online merchant can meet a vendor’s volume requirements, he will take the higher discounts and reduce his online price to help drive more business to his store. While this strategy may be good for the online merchant, it plays hell with the reseller that is on the street selling the VoIP product to the end user and finds out that the end user he sold bought the product from the online store.

In an effort to counteract this tactic, some vendors have implemented a Minimum Advertised Price (MAP) for all online stores. This tends to help, but customers know to call the store to get a quote and a better price. The vendors themselves actually reduce your margin with the MAP pricing. A MAP price should only be about 5 percent below the suggested list price. Some vendors set the MAP pricing at 15 percent below suggested list price. If you receive a 25 percent to 35 percent discount, the vendor just gave away 42 percent to 60 percent of your margin. I would suggest having a serious talk with the vendor or start looking for a new vendor.

If you want to make money selling VoIP hardware and software, make sure the vendor is in it for the long haul, insure they have quality products, and make sure they are committed to a solid channel strategy. IT

Don Witt is President of Cylogistics (

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