Situation: A company is completing the design of a new line of equipment which is expected to drive future growth. An important distributor for a company’s principal product – a consumable – also distributes equipment. The CEO is concerned that this distributor may perceive his new line of equipment as competing with their existing line. How should the CEO handle this? How do you position the company for growth?

Advice from the CEOs:

• Meet with the CEO of the distributor and ask two questions:
  • Can they sell the company’s new line of equipment, as well?
  • Do they have any other source for the company’s consumable product?
  • If the distributor must rely on the company for the consumable, whether they decide to distribute the new equipment line or not, there should not be any risk.
• The company has a wonderful opportunity to start doing business in a new way.
  • The company has a proprietary consumable and chemistry/formulation knowledge that will be difficult for others to copy.
  • The company now has knowledge of how to design equipment that utilizes the consumable.
  • Proprietary trade secrets may be more valuable than patents, presuming that the company can keep a lid on these secrets. Coca Cola and 3M have never sought patents on their key products. In a well-managed environment, trade secrets have a much longer life than patents.
• Think about the sales mix in a new way, one that would address concerns about the annuity vs. capital equipment mix as well as improve overall profitability.
  • Focus on turn-key solutions. Use Hewlett Packard as a model. HP makes the most money selling paper and ink cartridges – annuity products; not from selling printers which sell less frequently than the cartridges. A busy office will spend far more on ink cartridges and paper per year than they spend on printers – and at a better margin for HP.
• Combine the two prior points to leverage the new model.
  • Lease or provide the equipment at just above cost, in exchange for a contract commitment to purchase the consumable for a defined period.
  • Triple the cost of the consumable over time!
  • This should provide a more profitable and sustainable model. Adjust the cost of the ink upwards so that it pays. On a per-piece basis, the consumable at 3x or 4x current cost will still be a miniscule part of overall product cost. Further, the buyer won’t have to amortize the cost of the equipment over their production, making this an attractive option.
  • Concentrate on equipment design and outsource the manufacturing on a modular basis while keeping control of the one or two most critical components.

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