Tell me if this sounds familiar… you’re a systems integrator and you’ve been asked to come and bid on a project. At the bid line-up meeting, you sit down in the meeting room, and you look across the table, and there’s someone from the equipment vendor XYZ’s integration services department.
Of course the customer has specified that you have to use equipment from vendor XYZ, and of course the integration services wing of vendor XYZ can purchase this equipment internally (at a discount) so they can obviously undercut your price. This always left a bad taste in my mouth, but thankfully some vendors have stopped doing this.
But ask yourself why they would do this in the first place. Integration is a cut-throat market and the margins in the equipment business are significantly higher than doing integration. What business sense does it make to expand into a low margin market and risk annoying the very companies who are out there pushing your product to the end customer?
“Commoditize Your Complements”
Everyone knows the economic principle of supply and demand. If supply goes up, price goes down, but if demand goes up, price goes up. That explains what happens when equipment vendors offer integration services and undercut the competition: the supply of integration services goes up, and prices go down. This is their goal. This bears repeating: Their goal is to reduce the price of integration services in general.
Let’s talk about competitive products vs. complementary products for a moment. When a competitor lowers their price, you have to lower yours, but when the price of a complementary product goes down, demand for your product goes up, and therefore the price of your product goes up. What are complementary products? They’re products that are often purchased together, like razors and razor blades, cars and gas, or even automation equipment and integration services.
Gillette made a fortune realizing that if they reduced the price of razors, the demand for blades would go up. When the price of gas goes down, people buy bigger cars. Likewise, the automation equipment vendors know that if they can reduce the price of integration services, the demand for automation equipment will go up, and they can charge more for their product.
While I appreciate the value of competition, it needs to be a fair market. By choking off integrators, the vendors are just promoting a race to the bottom of quality.
Personally, I don’t think it has to be this way. In future posts I’m going to discuss things that the integration industry can do to reverse this trend and stop the downward spiral.