Here’s a phrase I created in the early 1980’s to describe what I clearly saw as the last chance to make high margins on the sale of computer hardware to businesses. In the day of the mainframe and then the minicomputer, margins for manufacturers exceeded 35% and dealers were granted a 35% margin as well. Even with the usual discount of 10%, the margins on hardware were high, especially when applied to prices that exceeded $30,000 per sale.
The challenge: Replacing lost margin
In the early eighties, IBM helped the PC become a tool of the office, and the product crossed over from use by early adopters to the mass market. Many other PC vendors flooded the market, including an uncounted number of “white box” manufacturers who created systems out of components imported from Asia. New retail channels popped up everywhere, competing for this lucrative, growing business segment. New magazines were rushed to market, thick with advertisements for computer systems and components at bargain prices. Many companies found internal employees able to install these computers and load software easily, without employing outside professional services.
[Email readers, continue here…] And those of us who depended upon the high margins from more expensive minicomputers found ourselves competing with these same PC’s, now growing to be as powerful as the much more complex and expensive computers of just a moment ago.
Finding the “niche with mystery”
Yet, there was one segment of the PC market that was not only growing but maintaining its margins as well as providing more professional services than any other segment of the industry. Most of us could install a computer, but almost none of us could network that computer with others in the office or with other offices without equipment we did not understand, configuration tasks we could not perform, and training we could not offer. So, we called upon our local value-added reseller with networking experience, often blessed with an earned certification by Novell or Microsoft. We paid high per-hour charges for professional services and unknowingly paid high prices for the networking equipment. But we were, as a class, happy with the fact that the computer and software costs had fallen so much that the networking costs were not an overwhelming portion of the computer budget.
The challenge to management
Observing this, when in a planning session one day, I told my senior management staff that we needed to find an area to defend our margins, one that still enjoyed the mantle of mystery to our customer base. Because, I said, “Where there’s mystery, there’s margin.” We did find that niche and used it successfully for several years, in charging to certify and configure a company’s self-purchased PC’s so that they would work efficiently with our software systems. No employee of our customer company could do this because no employee knew our software and its requirements for database setup, multi-user security and more. We were able to add $2,500 or more to each small installation, and much more for large installations even though we no longer sold the PC hardware.
I told this story often in speeches to software and vertical reseller organizations, and the “mystery” expression stuck. Not only that, but I began to hear it restated back to me describing other industries in which similar progress had caused companies to search for a “secret sauce” they could defend. Even some in the banking industry repeated this to me. And now, with AI, many of us will have to scramble to find that mystery to preserve our livelihoods.
Planning for the event…
It was only a small step to incorporate this into the strategic planning sessions for all companies that I later advised or served as a board member. And it still is important today – not just because of AI.
Can you find a pain point where the customer cannot apply a solution without your help? One where the cost and value are both defensible in maintaining higher margins?
Images created by Dave using DALL-E3.
