Printer Industry's Time-honored Business Model is Alive and Well
I've been skeptical about many of the claims concerning managed print services that have been made over the past couple of years. One that I've found particularly hard to swallow is that the much ballyhooed movement toward MPS heralds the end of the printer industry's venerable "razor-and-blade" business model.
Copier vendors learned decades ago how to bundle office equipment with services and supplies and deliver all three to customers profitably with a lease. Marketing MPS packages came naturally to the copier industry. The printer industry, however, made its money by selling hardware and consumables, not through leasing. Over the years, printer OEMs learned that they could lower the cost of their machines and make a profit off end-users who must pay a premium to print with OEM consumables. Despite hyperbolic claims to the contrary, this remains the way that printer companies make most of their money, and I don't see many signs of it changing.
Don't believe me? Just look at some of the most recent product launches especially at the low-end of the market.
Earlier this spring, market leader Hewlett-Packard launched a number of low-end monochrome lasers that help make my case. Sporting enhancements like expanded connectivity and higher print speeds over its previous entry-level LaserJets, the firm says its latest low-end lasers have what it takes to penetrate the SMB space. By leveraging the "razor-and-blade" model, HP managed to significantly improve the price-performance ratio, just as it has done in past generations of this class of LaserJet device. Jacking up operating costs allowed HP to maintain extremely low price tags while adding functionality.
HP replaced its aging LaserJet P1005 and P1006 with its latest low-end single-function printer, the LaserJet Pro P1102. Not only is the new machine faster than the P1005 and P1006, it also debuted with a $129 price tag, which was lower than the introductory price of its predecessors. The new HP LaserJet Pro P1102w is also faster than the older machines, and it offers wireless and Ethernet connectivity not found on the earlier machines. At $149, it matches the introductory price of the P1005, which was the lowest priced printer in the HP portfolio at the time. In addition to the single-function machines, HP also released its least expensive monochrome laser MFPs to date. Prices for machines in the new LaserJet Pro M1100 and M1200 MFP lines start at $149 and $199, respectively.
All of the new HP entry-level monochrome machines I just mentioned are based on the same Canon print engine. After consuming the 700-page starter cartridge they ship with, end-users in North America must purchase CE285A replacement toner cartridges, which print 1,600 pages and sell for $67.99. Here is where HP makes money. Using the CE285A, it costs nearly 4.25 cents to print a page, which is about a quarter of a cent more than what it costs to print a page with the CB435A, which is used in the P1005 and P1006. It costs about 4 cents to print a page with the older machines.
Now, gentle reader, you may feel that an increase of just over 6 percent in operating costs is hardly worth mentioning. Perhaps, but the fact is per-page costs have been rising for years and across categories.
When the LaserJet 1018 came out in 2006, it had a cost per page of about 3.5 cents, and that jumped to 4.0 cents per page with the P1005 and P1006, which were introduced in 2007. Successive generations of machines with higher print costs are the norm now with new low-end LaserJets. It costs slightly more than 3.7 cents, for example, to print a page with the new LaserJet Pro 1606, which was also launched this spring. The machine sits up one notch from the 1102 units and replaces the LaserJet P1505, which had a per-page cost of 3.4 cents. In this case, the cost increase is almost 9 percent in the new device over the old.
Don't get the idea that HP is the only printer OEM that continues to embrace the "razor-and-blade" model. Lexmark, Oki, Samsung and the rest have also demonstrated an unwavering commitment to driving profits through higher consumables costs. At the low-end of the market, where price compression is so extreme, hardware vendors really have little choice. They can raise the price of the "razor," and risk giving up market share, or they can leverage the "blade" for all its worth.
No doubt, MPS is providing new service-related revenue opportunities for printer manufacturers. The opportunities, however, are confined to certain market segments and obtainable only by certain classes of mid- to higher-end machines. And at the present time, MPS programs offered through printer vendors have managed only to attract a fraction of that market. With that in mind, a little skepticism is totally appropriate when someone says the printer industry is about to switch business models.
Posted by Charlie Brewer on 06/18/2010