How to negotiate margins with your HP reseller partner

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How to negotiate margins with your HP reseller partner

Andrew Cross

With Hewlett-Packard (HP) now recognised by some as leading the pack of vendors shipping servers worldwide and with it having further focused its position as the single source for all things network infrastructure, IT directors may now be considering HP as vendor of choice in more areas than ever before.

Learning more about the dynamics within the HP supply chain can extract even more value and spread pressurised budgets further. Often times, purchasing from HP is just associated with hardware and storage, but its product offerings also extend into the virtual data centre.

Beware the 'grey' market 
However, before unravelling the price supports in place within the HP reseller community, a word of warning regarding 'grey' HP products.

IT resellers finding increasing pressure on margin will naturally seek to reduce purchase costs. Sourcing product from non-official HP distribution partners who, in turn, are sourcing from outside the country they operate in, can achieve this. These 'grey' suppliers justify this approach in many ways. For example, one HP partner states clearly on their website that, "The grey market is simply a problem of manufacturers not being able to control sales regions within the global economy. There is nothing wrong with this; it is a matter of market forces creating a price opportunity."

Logically, this single argument makes sense. But it overlooks investments made by HP, its distribution partners and authorised resellers, along with the product knowledge required to professionally install and support HP products.

HP is very strict about where its authorised resellers source from, and those found to be sourcing 'grey' soon find themselves isolated from the official HP community. Encouraging this practise may bring short term cost benefits, but will also bring with it detrimental pressures.

Putting the 'grey' discussion aside, HP itself has other official routes for product purchases which do not attract such stigma, nor its legal wrath.

Remanufactured product route
For many years, HP has offered remanufactured products through its Renew Programme, attracting at least a 15% price reduction over new product. The range extends from the HP 9000 to Proliant servers, as well as storage. HP estimates that 80% of the product available through this programme was originally manufactured less than 12 months previously.

Product is made available for resale due to excessive factory stocks, customer returns, demonstrations, etc. All products revisit the HP production line, and quality control testing is provided with standard or CarePaq warranties just like newly manufactured hardware. It is also subject to the price support schemes HP provide.

Therefore, remanufactured product is essentially new product. An IT director with green credentials may explore the HP Renew Programme before increasing manufacturing demand by buying brand new product.

Regardless of whether hardware product is sourced as new or renew, HP provides price support through its Top Value and SmartQuote programmes. Top Value offers a monthly selection of hardware, software and warranties, which are typically in stock and ready to ship. SmartQuote provides a supported price across a broader range of HP product and over a longer period of time.

To agree on a supported price through SmartQuote, the reseller must show HP a business case to justify a price reduction. With Dell and IBM aggressively attacking HP users with attractive price offerings, it is relatively easy to convince HP to provide price parity because the company wants to ensure its offering is viewed as commercially attractive. The process takes between one and five days, depending on the products under review.

To get the best possible price, HP prefers to sign off bundles of products, not individual product lines. The intelligent reseller will do this without second thought. The IT director needs to ensure this saving is passed on to them.

However, what is not generally understood is that the SmartQuote programme covers more than HP hardware. The better definition for the programme is that all products offered with a HP part code are included. This means that the IT director can extend this price support to include VMware, Microsoft and Citrix.

Furthermore, the support and subscription programmes offered by those vendors can also be included in price support process. Clearly the advantages of better price support will need to be balanced.

Purchases of non-HP products through HP rewards different teams within the respective vendors. Unless the opportunity is large enough, it is unlikely that the vendor's channel-based team would be fully supportive if the vendor OEM team gains all of the revenues. HP tries to balance this by making its own resources available. But these resources are in high demand and not as readily available as they are from the vendor themselves.

The importance of performance
Beyond the purchase price programmes can offer, HP resellers are also directly incentivised on performance. This allows for rebates being paid directly to resellers by HP without any end user involvement. The amounts involved vary, but a performing reseller can expect to be rewarded with between 3% and 9% of the final purchase price.

For example, a current incentive under the banner of Partners for Growth allows resellers to earn different percentage rebates depending on the product supplied. However, if the opportunity is registered by one reseller it cannot be switched to another. For the end user, this means that selecting a reseller without this registration can further hamper the price negotiation.

Many resellers now share the cost price achieved from HP, agreeing on a small margin to cover administration costs, and are still satisfied with the achieved margin because they know rebates remain in place to provide a healthy profit.

With CEO's demanding cost control, and many demanding cost reduction, squeezing out the best purchase price can reap both cost and political benefits. Knowledge of the commercial factors in this process can keep you one step ahead.

But there is a warning here. A financially healthy channel partner who can guide the end user through the labyrinth of products, pricing and schemes offered by vendors will provide short, medium and long-term benefits to end users. By negotiating the entire reseller margin from a purchase, you simply kill the goose that laid the golden egg. However, with a little knowledge better purchase prices can be achieved whilst keeping peace of mind that your chosen reseller partner will be around for many years to come.

Andrew Cross is the sales director at vendor independent reseller Sol-Tec and a contributor to SearchVirtualDataCentre.co.uk. He donated part of this article's proceeds to the British Heart Foundation through the sponsorship of Nik Topham, who swam the BHF Pier to Pier. Others can donate at www.justgiving.com/Nik-Topham.


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