You're In The Wrong Business If You're Upset That Your Supplier Is More Efficient

from the welcome-to-reality dept

Saul Hansell at the NY Times has an interesting blog post about how various value added resellers (VARs) of Postini's anti-spam email solutions are upset at Postini's new parent company, Google, for drastically cutting the prices on Postini's offerings. Basically, they're upset that it's much more difficult for them to make a profit, and also because Google can now more efficiently service smaller customers, who Postini used to ignore, leaving them to the VARs. So, instead, these VARs are dropping Postini and looking for competitive vendors. Hansell even wonders if Google will be forced to raise the price just to keep the VARs happy.

My guess is that Google honestly couldn't care much less about what the VARs want. It seems to believe that the service was priced artificially high in the first place, and the company can do much better dropping the price and making the offering much more widely available. If VARs can't handle that, that's not Google's problem. What's more interesting, though, is this idea that VARs now think the solution is to go to a more expensive Postini competitor. Sure, it may seem like a better way to get the necessary margins, but eventually those efficiencies come home to roost, and customers will begin asking why they should pay so much to the VAR when they can just go direct to Google and buy Postini for a tiny fraction of the cost. If your supplier is much more efficient and can drop the price of something supplied, the answer should never be to drop them and sign up with a much more expensive supplier. You may fool some of your customers for a short period of time, but it's a losing long term bet.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    icon
    Killer_Tofu (profile), Feb 22nd, 2008 @ 5:38am

    US Companies

    I think a larger problem today is that all of the CEOs of companies who get paid way way too much for their job, are all focused way way too short term.
    It is all about how can I make the company look for this quarter.
    Makes me happy I work at a company where we have meetings talking about 5, 10, 20 years from now and our long term plans.
    Feel a lot safer here than I would elsewhere.
    Oh, and this is actually a French company. Just work for the North American business unit. Maybe that is why they are more long term.

    About the only time I am ever happy it is run by old people.
    At least they are seriously innovation based. Had the 60th anniversay gala last year. Was all about showing people from around the world who went to France and work for our company (I was very lucky to be one selected to go).
    Even with all of the different showings of our company's innovations, they never once mentioned anything regarding patents and how that makes us good *cough apple cough*.

    Long term goals ftw!

     

    reply to this | link to this | view in thread ]

  2.  
    icon
    Killer_Tofu (profile), Feb 22nd, 2008 @ 5:41am

    Disclaimer for my post#1

    I am not an economist in any way.
    And that is just how it appears to me with all I hear these days. And what I read here most of the time.
    Constantly major company after major company declaring bankruptcy and yet the CEOs still get paid millions.

    Delphi for example, goes bankrupt and yet in their bankrupt deal thing with the gov, they pay the CEOS 16million dollars (wanted to pay 80mil). Soooo, the CEOs can drive the company into the ground, and then get bonuses for doing so in the claim that "it helps the company stay competitive for paying the CEO". Where is the incentive at all to make a company do good?

     

    reply to this | link to this | view in thread ]

  3.  
    identicon
    whitneymcn, Feb 22nd, 2008 @ 5:43am

    Merlin Mann on "value add," via Twitter...

    "'...provide value added solutions' is not a mission. 'Destroy All Monsters.' THAT is a fucking Mission Statement."

     

    reply to this | link to this | view in thread ]

  4.  
    identicon
    Danny, Feb 22nd, 2008 @ 5:45am

    Well...

    At least those VARs didn't try to sue Google and Postini on anti-trust violations and copyright infringment.

     

    reply to this | link to this | view in thread ]

  5.  
    identicon
    Anonymous Coward, Feb 22nd, 2008 @ 6:13am

    The CEOs of companies are really no more important than the people on the bottom of this artificial corporate food chain that has been created. If CEOs don't start putting the other people in their companies before themselves, and refusing these ridiculous paychecks and bonuses, then their companies will ultimately be doomed to failure. Heck, even a lot of CEOs have publicly stated that they think they get paid too much. That being said, and our economy on the verge of a catastrophic breakdown, I think we need to rethink the entire corporate structure, lest we run ourselves completely out of business.

     

    reply to this | link to this | view in thread ]

  6.  
    identicon
    k20878, Feb 22nd, 2008 @ 6:26am

    gotta disagree

    There are three reasons to sell through a VAR:

    1) Access to markets you wouldn't be able to get access to otherwise, e.g. overseas, industry verticals, etc.
    2) Access to a large and varied sales force without a significant investment.
    3) VAR's ability to provide support and solution integration.

    So if Google is making their reseller program less appealing, they are saying that 1) it's a commodity product that doesn't really require much support or integration or 2) they are ready and willing to support the user base themselves and 3) they have access to same range of customers that the VARs did and don't really need them.

    My theory: Google is not really in the business of selling software, so they could be forgiven for not understanding reseller networks (a lot of businesses that could use them successfully don't).

    Supplier's pricing is always kept artificially high versus the VARs pricing otherwise the model doesn't work. Typical VAR discounts exceed 50%. VARs have limited time and resources, and they have access to many similar products, so if they cannot get the margins or supplier support for a particular product, they will switch in a heartbeat. Their end-customers will in most cases never know the difference, because they are most likely buying a bundled solution and not seeing or caring about the individual components.

     

    reply to this | link to this | view in thread ]

  7.  
    identicon
    MissingFrame, Feb 22nd, 2008 @ 6:42am

    Not a new concept

    Manufacturers routinely artificially

     

    reply to this | link to this | view in thread ]

  8.  
    identicon
    MissingFrame, Feb 22nd, 2008 @ 6:43am

    Re: gotta disagree

    Meant to agree with you, not sure how the posts got chopped.

     

    reply to this | link to this | view in thread ]

  9.  
    identicon
    Its the business model, Feb 22nd, 2008 @ 7:02am

    Deal with it

    The entire computer industry is a two or three tiered model - Manufacturer-Distributor-VAR - everyone has their margin - and customers like it, they go to Best Buy to buy there dell instead of online, the Apple store so they can talk to some geek at the Genious Bar. Manufacturers are stupid to cut out the supply chain, they just cut out a customer base that want to deal with "their" VAR. No, this isn't old thinking, the Apple stores prove that Genn Y or what ever you want to call College kids, want this same structure.

     

    reply to this | link to this | view in thread ]

  10.  
    identicon
    Hellsvilla, Feb 22nd, 2008 @ 7:07am

    Re: Deal with it

    Your own example contradicts itself. You are very confused.

     

    reply to this | link to this | view in thread ]

  11.  
    identicon
    Ryan, Feb 22nd, 2008 @ 7:29am

    Re: ceo's

    It used to be that the average CEO received a salary complete with bonuses that would be around 1.5 times that of the company's average employee. That is not true today (30-50). Over the years the salaries have been mega-inflated to attract what would be the best minds. It's quite funny that many execs go through and restructure (fire employees) to save the company a bit of cash each year, when a large part of the savings could easily come from their own personal salary. Can we really compete in a global market with that type of overhead?

     

    reply to this | link to this | view in thread ]

  12.  
    identicon
    JB, Feb 22nd, 2008 @ 7:37am

    You Get What You Pay For

    What the heck kind of analysis is this? You note that the "VA" stands for "Value Added". Shouldn't the reseller be paid for the value that they add? The price is not "artificially high". The price includes the added value of a local VAR, value that Postini customers will no longer receive.

    If you compete with your own resellers on price you are going to lose your resellers. You better be darn sure that you don't need them.

    As a Postini customer am I better off with support from the local Postini consulting firm, or support from a Google call center attendant reading solutions from a script? Do I really save money with a lower price?

     

    reply to this | link to this | view in thread ]

  13.  
    identicon
    mcc, Feb 22nd, 2008 @ 7:54am

    Re: You Get What You Pay For

    VARs shouldn't be competing on price, they should be competing on the value they add. Add enough value, you will get the price you are asking.

    If they can't compete with the supplier because their price is too low then their customers obviously don't perceive the added value of buying from the VAR as being worth the added cost. In this case they are nothing but a middle-man with no real added value. If the supplier sees a way to cut out the middle man most consumers would agree this is a good thing.

     

    reply to this | link to this | view in thread ]

  14.  
    icon
    AG (profile), Feb 22nd, 2008 @ 8:10am

    It's the relationship, not the price

    I think the article's closing statement about raising the price is throwing off readers and missing the point.

    The price change is a red herring. The resellers are unhappy that Google is selling direct and bypassing them, not that the price of the service is going down.

    To wit, if a VAR can add $20 of value to a $30 service and sell it for $50, why can't they also add $20 of value to a $3 service and sell it for $23? If customers want to buy support from a VAR the fact that the cost of the underlying product has gone down shouldn't change that fact.

    The only reasons the VARs would prefer to resell a more expensive product is because A. it better meets the needs of their customers or B. the product is sold only through VARs so they do not have to compete with their own supplier.

     

    reply to this | link to this | view in thread ]

  15.  
    identicon
    syN-acK, Feb 22nd, 2008 @ 11:12am

    Nothing New

    Having worked for VAR's for the past 15 years, I agree with k20878's and AG's posts. I think the article and blog post are misleading. The stated reason the VAR's are leaving is for "more channel-friendly vendors" but the post insinuates it's because of the dropping price. As indicated in the article linked to it "Postini's direct sales force had been approaching customers directly." As a VAR, I don't care if my supplier drops price, I do care if they have become a competitor. How is it wrong of the VAR to begin looking for other options? Would it be wrong to begin selling Fords if you are a Chevy dealer and Chevrolet begins selling direct instead? We've dropped many vendors who have attempted to bypass VAR's and go direct. Sometimes it backfires, sometimes its because the market changed. Even Dell reluctantly recognized the value of having VAR's as partners. My opinion as stated by others is the spam market is a commodity now. It's time to look for other technical solutions where VAR's can offer added services.

     

    reply to this | link to this | view in thread ]

  16.  
    identicon
    Ajax 4Hire, Feb 22nd, 2008 @ 11:56am

    ahh yes, Google is now the new Wal-Mart...

    lets pick on the big guy.

    Wal-Mart does the same thing, drastically lowers the price and makes the difference in _huge_ volume.

    Google was originally a search portal, still is; but now Google can use its size and search capabilities to make money in other areas.

    I see the Google Bashing that use to be Wal-Mart Bashing. Same Game, new name.

    This is always the case when a large competitor enters the market. Large companies think big, think price, think volume and think profit.

    A Business is in the business to make money.
    Don't fault a business for doing what it is in the business to do.

    P.S.
    Don't confuse a business with a thief.
    Theft is not a business model; the only way theft works is if it is under government control, ie. taxes.

     

    reply to this | link to this | view in thread ]

  17.  
    identicon
    Iron Chef, Feb 22nd, 2008 @ 5:21pm

    There's a point here somewhere...

    Part of the challenge is when the company's technology is based on a WinTel platform, whereas Google embraces open standards.

    The idea of open standards/GPL is interesting because there are is a multitude of tools in the toolchest that have little or no cost associated with them, whereas the propietary route is generally filled with third or fourth party EULAs that need to be licensed before a product can go to market.

    When utilizing the propietary route, implementation is (generally) by design meant to be streamlined, which, maybe for the purposes of this conversation, could make it a less scarce resource simply because design methodology is meant to be commoditized and repeatable.

    Foe example, consider email in the old days when BBSes were around and we had to configure FidoMail network to work with programs like FrontDoor, InterMail, BNU Fossil Drivers. Back then, it was probably one of the more scarce of resources, which probably seeded ideas of community and collaboration on a worldwide scale. BBSs that had this technology saw it as a contributer to their success, but it was not the end-all contributer, and this skillset was useful. It took several years, but the same concept was adopted by business utilizing the TCP/IP stack.

    Today everyone has email, partially because of adoption of systems such as Exchange.

    But what's most interesting is that when one camp thinks they are exclusive of the other, when the reality is that both methodologies need each other, and have a very specific role in adoption of a set application or standard.

    So I know i've really strayed off the original topic, but after I reviewed this, I just didn't have the heart to abandon the submit button.

     

    reply to this | link to this | view in thread ]

  18.  
    identicon
    Riprap, Feb 23rd, 2008 @ 5:13am

    As a potential customer of Google's Postini product, I have to say that i am thrilled at what they are doing. I am a very small business. Postini wouldn't look at me. Their VARs asked too much money, and the value they add was overkill for a small business like mine. With Google, I can get the benefit of the product, at a killer price, and all I need to do it manage the process myself. This is the same model as AdWords. Traditional ad agencies either ignore very small business or overcharge them. But with Adwords, I have a very effective ad system for very little money, as long as I'm willing to take on the work of managing it.

     

    reply to this | link to this | view in thread ]

  19.  
    identicon
    Postini Partner, Feb 23rd, 2008 @ 8:57am

    Channel sales helped the SMB...

    Postini had minimums for direct purchases and a sales channel to handle the rest. We have been a partner for 5 years and specialize in small business services for Postini now Google.

    No business was too small to help out. Our goal was to make sure that anyone that wanted Postini could get it. Postini has had and still has the largest user base of hosted as/av services.

    If you can manage the service yourself, that is great and a minority to the exception, but many could not and were happy to accept our services.

    The lower pricing will certainly help spur sales, but I do not see it reducing the support needed, at least not yet.

    As a partner we not only sold to SMB, but also to other service providers, who also were able to afford the service for their customers.

    No matter what the price, support service will always be available. Look at the companies that support Google Apps and charge for the setup for it. There are companies that support Adword users, helping them learn the system, or directly manage it for them. Service sells.

    For those VAR's looking elsewhere, as they say the grass isn't always greener... IMO, you are up for more of a challenge to move your customer than to keep them, as your customer may not share your motives. Looking for other products is one thing, flipping the customer is another.

     

    reply to this | link to this | view in thread ]

  20.  
    identicon
    Chirag Mehta, Feb 28th, 2008 @ 9:53pm

    Business model innovation opportunities in designi

    The business model challenges are far more complex and brutal than the technology or architectural challenges for SaaS and they get compounded when selling to an SMB. It has been argued that the success of complex to implement enterprise software in marketplace is attributed to the channels, ISVs and VARs, to a certain extent since they step in and do the dirty job and it is a very lucrative business for them. If the VARs are not selling it, customers won't probably buy as much.This has serious implications on the SaaS as a delivery model. The fundamental benefits of SaaS such as pay-as-you-go type subscription models, try before buy, personalize against customize, and no physical box are some of the factors that work against the SaaS vendor since there aren't enough incentives for the indirect channels with the current business model. I have a detailed post on my blog at: http://cloudcomputing.blogspot.com/2008/02/business-model-innovation-opportunities.html

     

    reply to this | link to this | view in thread ]


Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here
Get Techdirt’s Daily Email
Save me a cookie
  • Note: A CRLF will be replaced by a break tag (<br>), all other allowable HTML will remain intact
  • Allowed HTML Tags: <b> <i> <a> <em> <br> <strong> <blockquote> <hr> <tt>
Follow Techdirt
A word from our sponsors...
Essential Reading
Techdirt Reading List
Techdirt Insider Chat
A word from our sponsors...
Recent Stories
A word from our sponsors...

Close

Email This