Networking

Determining markup on resale to your clients

IT consultant Chip Camden offers advice to a TechRepublic reader who is having a hard time figuring out how to charge customers for network monitoring.

I recently received an email from TechRepublic reader Scott Billups, who is having a hard time figuring out how to charge customers for network monitoring:

Network monitoring is something we would like to offer, but [we're] not sure how to charge customers. We were looking at Spiceworks, but to me Spice works is good, but slow to operate. We do like GoToManage a lot (we are very interested in their GoToPro), but see that for $89, their lowest price is fine, but [we're] not sure how much to mark it up on our end. How [can we] define how much to mark it up but fairly?

It sounds like you're trying on the reseller hat. The question to ask yourself in that case is "What value do I add?" What is my involvement in the transaction worth to my client? Why would they pay me to help them buy and use this product?

Back in the days before Amazon and others revolutionized Internet sales, resellers provided a value merely by bringing products to the consumer -- the trouble and overhead of selecting and stocking inventory, as well as the activity of concluding an individual sale, were all worth something. Nowadays, websites typically provide all of those functions at near zero cost. Perhaps you can charge something for the selection process based on your informed opinion as a consultant, but it can't be much. The Amazons, Googles, and even Facebooks of the world are tirelessly working to render that business model obsolete.

In some reseller agreements you may be able to secure a discount from the original seller. In that case, you can mark the price back up to at or near retail to make money without apparently charging your client anything. If you split the difference, providing a discount for your client while still making money, then it's a win-win. It could be an even bigger win, though, if you give the product to your client at cost -- and make a point of letting the client know about it. The payoff in goodwill is enormous.

Rather than charging extra for the product itself, perhaps you should consider charging only for the associated services you will provide. Will you be installing and configuring this product for the client? How will you participate in its ongoing operation? If these are all activities that the client would rather have performed by you than by themselves, then you can charge for them. But don't gouge -- if the client could spend an hour learning a new procedure that requires only two minutes per week rather than paying you $100 a month to do the same thing, they'll feel like you've been taking advantage of them -- if they find out about it. Don't assume they'll never know. This leads to a more general consulting maxim:

Never base your business model on your clients' ignorance.

Sure, part of why clients pay you the big bucks is for the degree to which your knowledge and experience exceed theirs. They expect, however, that you will impart some of that wisdom to them, not keep them in the dark. Your job as a consultant includes at least as much education as execution. That may render part of your job obsolete, but it usually leads to bigger and better things.

Do you see where I'm going with this? When you "nickel and dime" your client, you're effectively saying that you don't trust that your relationship will go any further than today's transaction. If, on the other hand, you eschew the small potatoes in order to build trust in an ongoing relationship, you'll probably end up making much more money in the long run. Your client will be happier about it, because you'll be providing an ongoing value to them.

About

Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant b...

12 comments
casey
casey

The cost of the service or product (the "inside") has nothing to do with what the customer is willing to pay (the "outside"). Competition will most likely provide the gating factor on the top end of what you can charge if there are substitutes your customer can readily acquire. Your pricing decision needs to be based on a number of factors, not the least of which is an estimate of the customers long term value to you. As has been pointed out, sometimes giving something away to secure that long term revenue stream (from something else) is the way to go. Regardelss, it always comes down to what customers are willing to pay.

santeewelding
santeewelding

Is when I come by stock for nothing; specially when they have no prayer of access to it. Then, it's the fine art of reaching up with thumb and forefinger -- in their presence -- and snatching a number out of thin air.

Sterling chip Camden
Sterling chip Camden

I don't resell products at all. I may recommend products, but I let the customer do the purchasing themselves. If I can get it at a discount, I'll pass on those savings to the client. I'm not in the reseller market, I'm in the service business. How about you?

Sterling chip Camden
Sterling chip Camden

... but it does determine supply. If customers aren't willing to pay cost plus something, then nobody can make a profit selling it. As supply therefore becomes more scarce, the customer's willingness to pay should go up. Basic Adam Smith there. Exception for when you give it away. In that case, you're viewing your cost as an expense in marketing, for the most part.

mactrekr
mactrekr

I tell my clients right up front that I'm not a retailer. I offer to source the products they need for a given project and either give them the specifications and let them shop it or I give them the option of ordering through me. I will mark up 10 to 20% and sometimes more depending on the amount of trouble I'll have to go through to get the item. The customer will usually ask me to handle it, but the moment they balk at the price I quote them, I remind them that they are welcome to handle the ordering on their own, provided the item they source is to the agreed upon specifications.

HAL 9000
HAL 9000

I don't have a problem on selling what the customers require. But to be realistic I don't resell Low Range Bottom of the Market type products. I sell what isn't freely available to people who need that product. However the reality is that while selling product makes some money it's far more profitable to sell my time as the profit margins on new hardware is very small so I personally see it as part of the service not the reason to be in business but a cost of doing Business. When you take into account [b]Your Time[/b] in setting up the thing properly it's generally costing you money. But I'm not like the Big Chain Stores here is an Unopened Box hope you have some joy with it. I never sell product in an Unopened Box and not only do I make sure that it's functioning properly but that it's Fully Updated so all the customer needs to to do open it and start working. I also supply all that they need and don't leave them wanting accessories to do their work. Things like NB Bags and Cool Pads are part of the deal not something to start thinking about after the sale. Col

JohnMcGrew
JohnMcGrew

That's what I'm selling: My time. Once upon a time when retail was much different and you had to have contacts and vast knowledge to acquire IT hardware and products, there was a margin that would make the effort worth your while. That all disappeared by the '90s when mega-retailers made most products widely available and prices well established and known, and wholesale margins became razor-thin. At that point I stopped trying, and simply began selling everything at cost, and tacked on my time spent on any purchasing endeavour. What I found was that those clients who might have questioned the margin I was formerly tacking on to what I was selling would not question the time I spent on spec-ing out or acquiring a product on their behalf. Why they might have been uncertain about the possibility of being gouged because of their ignorance about what something really costs, they were far more certain about how much time could be spent orchestrating and acquisition, and the value of my doing so on their behalf.

Sterling chip Camden
Sterling chip Camden

... and the added value that provides to the client. That justifies a bill, sure enough. The question is how that looks to the client -- is it included in the price of the hardware, or as a separate line item?

Sterling chip Camden
Sterling chip Camden

... my main point. If your fee is presented as a "markup", then the client wonders what on earth you had to do with creating or improving these products that you're reselling. But when you bill specifically for your contribution, it makes sense to them.

HAL 9000
HAL 9000

But only because it saves me time in the long run. If they buy new hardware from the Big Chain Stores I'm there constantly showing them what they need to do/add or whatever to start to work. If I do it myself up front I don't have to waste my time doing what is the bottom end work. Sure it needs doing but I don't have the time to waste doing it for the customer. Recently i just moved 40 NB for cost price and I updated them all. Mind you the returns is I have a Long Term Client who will not look elsewhere so maybe I should start charging them. ;) Besides as I said above I see things like this as a part of the business keeps the clients happy and me doing what I get the Big Bucks for. :D Granted some times I would love to be doing Hardware Installs instead of tearing into a Broken Banks Security System and making it work again but the reality is that you don't get paid very well for Hardware Installs. ;) Col