By Paul Kunert

28 July 2008 

Raising prices would appear to be commercial suicide in the current trading climate but such is the pressure on the channel that talk among some distributors has centred on doing just that.

Ingram Micro was first to break ranks last week - closely followed by rivals - after admitting it could no longer absorb increased freight charges in light of rocketing fuel prices and would pass the costs on to resellers.

But a further seven days has brought new issues into the open and the spectre of upfront price rises has been mooted by Tech Data's UK subsidiary Computer 2000 amid complaints that vendors have not factored the downturn into quarterly sales targets that govern rebate accruals.

"Vendors' slowness to align targets to the current economic conditions is making us look hard at how much rebate earnings we will make and it is likely to necessitate some price changes upwards," said Andy Gass, managing director of Computer 2000.

"It is going to be more difficult to drive growth and vendors are potentially going to pay us less in terms of back-end compensation. I need to make that compensation elsewhere because I still need to work hard to get the business," he added.

Sources claim sales in the market were five to ten per cent below vendors' expectations, and Gass said many were using short-term pricing tactics to shift kit from PCs to printers, heaping extra pressure on partners to hit revenues.

"I think some vendors' pricing

has been damaging to themselves. There is a constant round of people taking short-term pricing actions that are reducing ASPs. They need to take a longer-term view of the market," he said. 

Challenging targets

Rebates are important to the whole channel, said Duncan Forsyth, Westcoast managing director. He added distributors were always under pressure from resellers and vendors but under current conditions it was perhaps felt more acutely.

Asked if vendors' current targets were realistic, Forsyth said they were set at a global level and passed down to the local operations. He conceded, "Certain targets are challenging, but we have always operated in a challenging market."

In terms of sales targets, some major vendors, including Hewlett-Packard and Microsoft, are looking at changing the way they compensate distributors, with the former making changes to the way partners achieve rebates.

From 1 November, HP will pay distributors higher rebates for developing the CDP attended space - resellers not directly managed by HP - and less for selling to top-tier Gold and Preferred partners.

There are a number of elements to distribution partners' funding, Dave Poskett, director of the HP solutions partner organisation (SPO) for the UK and Ireland, told MicroScope last month.

"We will be asking the distributor to place a greater emphasis on growing the CDP attended part of the business while we focus on developing the Gold and Preferred partners," he said.

Though not commenting directly on proposed changes to any vendor's Ts&Cs, Graeme Watt, president of worldwide distribution at Bell Microproducts, said there were risks associated with rebates.

"One of the risks is that vendors pull their belts in to adjust to market conditions. The other major risk is that vendors set unreasonable expectations which the market, let alone individuals, cannot meet," he said.

There are ways of managing this potential loss of back-end rebate he said, including renegotiating sales targets, reducing inventory to cut costs, cutting prices to stimulate volumes or raising prices. "I don't have a pricing programme that is planning to put prices up or down," said Watt.

He continued, "If the market is down you have got the same bunch of distributors fighting for the same slice of business to maintain market share and rebates. Most people would recognise that there is downward pressure on price typically, rather than upward pressure."

The pressure on the channel is not experienced exclusively by distributors, as resellers will also be feeling the strain to hit targets and make additional margin at the back-end.

"So far, we haven't got the feeling that targets are taking into account what is happening in the market. They will get harder to hit over the next couple of quarters," said Martin Hellawell, managing director of Softcat.

There was a temptation to raise prices, he agreed, but the market would resist any such changes. "The market will be so hard over the next six months and resellers will be competing hard for business."

Brave move

Combined with the freight charges, raising the buy prices for consumers who are getting more conservative and businesses that are already delaying spending would be a brave decision, agreed Alistair Edwards, senior analyst at Canalys.

"Vendors have to recognise that the market conditions are very different now and we are potentially heading into a recession in the UK," he said.

"Realistically, the possibility of increasing prices is unlikely to stimulate the market, it is a difficult time to do that," he said.

Distributors have threatened to raise prices in the past and have backed down before implementing the changes. Whether 2008 is any different will depend on how tough the market becomes.

The channel understands remuneration and the danger for all vendors that set targets too high is the potential to lose mindshare among distributors and resellers. _