How much margin could a distributor or integrator get?

In the IT industry, or maybe in any industry, you can build a business as a distributor or integrator if you have no own hardware or software product.  But unlike ten or twenty years ago, the living space for these middle-man is getting smaller, and the margin has a trend to zero.

The company I’m working for is a distributor/integrator in IT industry.  In a recent reselling case, we win it because our upper stream distributor is willing to lower their margin down to 2.8%.  In a recent bid, we lost to another system integrator because they could offer the same products at cost (we have the same cost).  Not long ago in another tender, we act as distributor and win the case because the down stream integrator can bid with the cost we offered.

Firstly I wonder such phenomenon only happens in Hong Kong and Macau, as the economic here is not good comparing to the neighboring area such as the mainland China.  But after I raised the question among friends in mainland, I am surprised to find that nearly all of them face the same situation.  Some of their cases are even more extreme, that they can only win a tender with price lower than cost.

There are some obvious reasons that causing this trend (more or less Porter’s Five Forces):

  1. In many companies, the bonus of a sale representative is tight with revenue, not profit.  So to reach their sales target they are more willing to sacrifice company profit for personal bonus;
  2. Some product owners are selling directly to the end customer, getting rid of the channel partners.  In this case the reseller/integrator can only get the same price as their client do;
  3. Some other product owners are selling through many partners in the same region, causing the competition.  The reseller has no option but to conduct price war;
  4. Some product owners simply ignore the partner agreement and bid the same tender with their channel partners.
  5. No matter how the product owner sets their sales scheme, the local distributor can only cooperate as they usually has no right to set price;
  6. Newer and cheaper products comes to the market each year.
  7. More end clients are willing to contact product owner directly, and can get direct support from product owner.

However, no matter what reasons that causing the dilemma of IT distributor and integrator, one key factor remain true: ‘The value you add equals the margin you get’.  Finding a product for a client is no longer a ‘value’.  Your client can easily dig out more than you could.  To hold the business and the profit margin, you need to provide solid service and really help solving client’s problem.  It could come in many way, like localizing a software’s UI, customizing a software feature for different need, adding extra features, connecting it with other products, bundling and integrate several products into one cohesive solution.

But in my view, the life of a distributor/integrator is just getting harder and tougher.  The only good way out is to have your own product.