Richter Scale^® Articles

(First published in the CAD++ Newsletter in early 1994)

Or, A Lesson in the Proper Channels

It's often difficult, when first starting your own business venture, to come up with the necessary funds to get the equipment and other materials you frequently need (or just want). This includes magazine subscriptions, new PCs, software utilities, and countless dozens of other things. Now, if you could be assured of getting name brand products at wholesale prices, all for the cost of a few stamps or phone calls, wouldn't that be worthwhile?

At this point, you're probably wondering if I'm trying to sell you one of those Price Guarantee Club deals or something. Nope, nothing that obnoxious. What I'm going to tell you about will be obvious once you think about how manufacturers sell products.

The Product Sales Food Chain

In order to get a product to consumers, manufacturers in the PC industry use several channels:

• Distributors, also known as wholesalers, get large discounts from manufacturers, ranging from 25% to 60% (hardware manufacturers usually offer smaller distributor discounts than software manufacturers). The reason distributors get such large product discounts is because they tend to buy in large volumes and then sell only to dealers and resellers, ranging from the mom-and-pop shop to the big retailers (Egghead, for example).
  
• Resellers/Dealers get smaller discounts from manufacturers because, in theory, their volumes are lower (usually ones and twos for most CAD dealers). If a product is available through distribution, this will frequently be the easiest way for a reseller/dealer to obtain the product, although nowadays manufacturers are offering lots of perks to resellers who buy direct. Figure that a reseller/dealer can usually get products at anywhere from 15% to 45% off.
  
• Mail Order companies. These guys are another form of reseller, but because they don't have to provide much support or offer a store front (or even a visitable office), their overhead is a lot lower, which is why they are able to pass much of their discount on to you.
  
• Direct. Most manufacturers these days offer products direct to consumers these days. All it takes is a phone call. Frequently they are running some type of special that might get a you better deal than you'd get at your local computer store.

Now, why is this important? Because, as a reader of this publication, you probably qualify as a consultant, and many consultants also resell other companies' products. So, this means, as a consultant, you could honestly promote yourself to distributors and manufacturers as a reseller (think of the price benefit you could provide your acquaintances with!), in most cases.

The reason you won't always qualify has to do with the various levels or types of reseller programs manufacturers offer, as follows:

• Authorized Reseller, Type 1. This tends to be the most stringent type of reseller program, requiring certain volume commitments, and certification that you have certain skills. Frequently, a business plan is required. Unless you intend to spend most of your time actually reselling these products. This is the type of program that most large CAD companies use for their mainstream packages.
  
• Authorized Reseller, Type 2. This one is a lot less painful, and easier to deal with, as it requires you to fill out a reseller application, and possibly a credit application, but the likelihood of not being approved is virtually non-existent. Most distributors require you to fill these out. Think of it as a great way to build a credit history for your business.
  
• "Hi, I'm a reseller/consultant/dealer". For many manufacturers, telling them this is good enough to get you dealer pricing, although you may have to buy more than a single product to kick off your reseller status with a given manufacturer. It also frequently gets you access to low-cost, not-for-resale versions of the manufacturers software. Microsoft had a program like this where you could get a not-for-resale copy of any program they offered for only about $50. It may still exist, but I haven't checked it out in the last couple of years.

Note that just about any company you try to buy product from as a consultant/reseller/dealer will also require you to supply a State Sales Tax Reseller's Exemption Certificate (or simply said, a Sales Tax ID), which is something you'll have to apply for in your own state (usually with the Secretary of State or State Department of Revenue). This certificate basically indicates to the companies that you are purchasing goods from that they should not charge you sales tax for the products you purchase from them, because you will be reselling or integrating the products in your offerings and charging your customers sales tax instead. Legally, if you keep the product you purchased for your or your company's personal use, you must pay your state the sales tax for the product, since the distributor or manufacturer didn't charge it. On the other hand, if you got the products via mail order from a different state, there's currently no real way to track the value of such transactions, so your conscience must be your guide. Several bills are floating around Congress to force mail order companies to collect sales taxes for all destinations because states feel cheated in their sales tax revenues. For those of you in Europe, some countries handle VAT (Mehrwertsteuer auf Deutsch) in somewhat the same way as U.S. states handle sales tax.

If you have a Sales Tax ID, most distributors and manufacturers automatically assume you are a reseller. I should point out that if you live in a state with no sales taxes, like my current home of New Hampshire, you may have to argue with the distributor or manufacturer for a while to explain that no Sales Tax IDs can be had in your state.

A couple of the largest distributors you should be aware of: Ingram-Micro at 1-800-456-8000 and Merisel @ 1-800-MERISEL. Call them and ask for reseller applications and sample catalogs. You can also call Computer Reseller News at 516-562-5000 to get a sample issue and a subscription form, now that you're setting yourself up as a consultant who resells. Finally, to get yourself on all the proper lists to get mailings from people who think you're a reseller, attend a COMDEX tradeshow or two. It'll work wonders for getting on mailing lists.

Alternate Channels

I've spent a lot of space here on how to be considered a reseller to get lower pricing, but I wouldn't want you to overlook the obvious: buying generic and buying mail order, and developer programs.

While buying products from distributors is great for name-brand products, you can frequently get a better deal going with generic versions (i.e. a no-name local brand PC vs an AST PC) or by going mail-order (Gateway, for example). This is very likely to be a worthwhile bit of research when looking for systems, peripherals, and other hardware, but not for software, where distribution or the manufacturer are far better options.

Developer Programs

My company is a registered developer with a bunch of CAD software companies. When we started out 6 years ago, at several thousand dollars a package, there was no way we could have possibly afforded to pay for all the CAD packages we use for testing and developing. The CAD companies realized this was a problem, and came up with registered/authorized developer programs. By signing up with these programs, you can get free copies of pretty much any of the software a given CAD company offers, providing you sign an agreement to only use the software for testing and development purposes and not for any real commercial CAD use. If you're developing a CAD add-on, that's not a bad deal.

Registered developer programs are not only limited to CAD software companies. Most large software companies tend to have such programs, where they may offer their product at a discount to developers. Novell, Microsoft, and Lotus, among others, offer these types of programs.

Other Types of Soft-Goods

Before I close out this month's column, I'd like to mention two often overlooked computer related items: Books and magazines.

I've found two ways to save on books. The first is arranging an institutional discount at our local Barnes & Noble, where they whack off an additional 5% off the existing 10% they already provide on all books. They justify this because we buy hundreds, if not thousands, of dollars of books per month. It's a good thing to try to do if you have several avid readers in your community - pool your buying power.

The other way, which also involves buying in volume (10 books at a time), is to go direct to the publisher. For example, Random House, which has published my latest collaborative work, AutoCAD Power Tools, offers anyone who order 10 books at a time, a 50% discount. If you whine and wheedle, they may even let you mix and match.

Finally, we get to magazines. At Panacea, we get over 30 different magazines delivered to us a month. We pay for none of them. Some we get because we filled out a little qualification form for a free subscription, but many we get because we are "comp'd". A "comp" subscription is a complimentary one, given to you by the publisher either via a sales manager's request, or via an editorial request.

Getting the advertising manager to comp you on a subscription requires just a call to the magazine you want, asking for the sales department, and explaining to the sales manager why it is you are interested in his or her magazine as a potential venue for your advertising. The magazine should have some relation to what your business does, since it's unlikely that you'll convince a sales manager for a cycling magazine that your CAD product is a good match. If you have a reasonable match, ask to be put on the comp list. More times than not, a sales manager is not going to risk annoying you by refusing your request for a comp subscription in case you really will advertise with the magazine at some point in the future.

Getting an editor to comp you is much more difficult, and can generally only be done in one of two ways. The first is that you write for the magazine occasionally (more on this in a future column). The second way is if the editor in question is a friend or an acquaintance that needs your help every so often (for quotes, for example).

Conclusion

Many people in our industry often pay much more for products than they need to. All it takes is a little entrepreneurial spirit and some know-how, such as what I have provided, to be able to save a little bit of money for the future.

(First published in AutoCAD Market (The CAD++ Newsletters' predecessor) in January 1991)

Let's say you have a product - a device, software package, or service - that you think you can sell to the public at large. Does it (and do you) meet the following criteria?

• It solves a problem and/or makes certain tasks easier.
• It has a target audience.
• It works solidly and reliably.

These criteria are important for anyone, whether it be a one-man operation looking to start up or a large, established company. Let's look at why these criteria are important in launching a product.

Solves Problems/Increases Productivity

Unless you're the kind of person that can sell refrigerators to Eskimos, you need a product that will make sense to the people you try to sell it to. If it solves a problem, especially a problem that is really irritating, then it makes sense. In the AutoCAD environment, a good example of this is a plot spooler.

A plot spooler helps eliminate the wasted time spent waiting for a plotter to plot a drawing. That wasted time translates into time, and hence, money. A plot spooler also happens to increase productivity - but almost any product that solves a problem will do that.

If your product is a service, it still needs to meet this problem solving need. Services such as plot scanning, 900 numbers for ACAD help, and being an AutoCAD dealer all meet this requirement.

I should point out that "sex appeal" plays a part, especially for products that are not especially useful. Sex appeal not only applies to beautiful models wearing the latest in skimpy apparel, but also to products that touch the emotional part of the soul. These "sexy" products have to look neat (as in "wicked awesome" - a term widely used by today's teenagers) and appeal to our sense of adventure. An example here might be the "beetle" mice, mouse warmers, or even Autodesk's Animator. Animator is definitely useful, but generally only to the small set of humans that have creative and artistic skills. But yet, Animator and its resultant creations, raise that emotional spark in the rest of us, giving us the feeling that by using that package, we might in fact find an artistic streak or a flair for visual creativity within us.

Target Audience

In addition to solving problems, your product must have a market. If there are only 14 other people in the world who can use your product, you either have to be able to justify an outrageously high price, or have minimal overhead - and this only applies if you can easily contact these 14 people.

What this boils down to is that you need to target your audience. If it will take thousands of phone calls, letters, etc. to land minimal business, you should probably find another product. However, if your product applies to a reasonable subset of people that you can target (i.e. 20% of all readers of XYZ Magazine), then you have a potential winner, just by using XYZ Magazine to market your product.

Target audience mismatch is one of the biggest flaws in product marketing strategies. This is important to consider if you are planning on developing a product you think will be useful to others, because targeting an audience should be part of your development and design efforts. Too often, an engineer will develop a "great" product, only to discover that no one wants it. You shouldn't be developing pink pastel gun racks for members of an all-macho-male gun club, nor should a portable cassette player mean one that weighs 10 pounds and comes with an atomic generator on wheels.

Targeting also applies to price. Look at other similar products that may already be on the market and see what prices these products sell for. Look at what features they offer that are better or worse than yours. And based on that, price your product. If the competing companies have had the products on the market a while, these companies have probably determined the best price point for their product, and you can use their research. If you don't have much to differentiate yourself with, offer a lower price. Make sure however, that your price covers at least your material expenses, such as packaging, shipping, and even phone calls. This gets a little bit more complicated if you go through dealers and distributors, and I'll cover pricing and price elasticity in a future issue.

If the product you have is new and different, you can do some inexpensive research that will help you better price your product. Call other likely targets. Also take advantage of local user's groups and even electronic conference, such as CompuServe. Ask questions and maybe provide an incentive, such as a discount on the product, in return for useful information. This approach can also help you tailor the product more towards your target audience.

Solid and Reliable

This should go without saying, but unfortunately, pride in workmanship has sagged badly in past years, and usually seems to be inversely proportional to the size of the company behind the product at times. In any case, in order for you to survive in the long run, your product must be solid and reliable, and if a customer discovers a problem, do your damndest to resolve it, quickly. The best way to ruin a company is to ship incomplete or buggy product, or provide lousy service.

Secondaries

If you managed to respond positively to the three main requirements above, you may have a good chance establishing your product in the market place. Two other criterion are useful to help you do a better job of marketing and selling your product:

• Writing well or having a friend who can write well.
• Being able to afford to spend at least a couple of hundred dollars.

Writing Well

Writing is important because it is used in a wide number of areas: product manuals, product literature (brochures, etc.), cover letters, correspondence, and publicity. If you do the writing yourself, always have someone else proof it. If you have someone else do your writing (preferably someone known for his or her writing skills), compare it to how you would write. Have them compose a sample cover letter, and use it as a template for all your future letters. And use your spell-checker or dictionary. There few things that will turn off an educated customer more than improper use of language and bad spelling.

Money

Money is always important. The reason I specified a couple of hundred dollars is because that's what it will take to buy an answering machine and get a separate phone line installed in your home. This is to make sure that once you start your marketing efforts, any customer or potential customer can get in touch with you. Make it as easy as possible for a customer to order your product. This grows down the road into 800 numbers and FAX machines, as well as BBSs and participation in electronic conferencing systems.

Summary

While this is still a coarse view of product planning and marketing, using these tips should help put you on the right course towards making a product successful and profitable. See you in the next Garage Entrepreneur!