Purchasing PC Parts
Copyright 2010 by Morris Rosenthal
All Rights Reserved
Buying PC Hardware
Buying and Selling Computers (Excerpt)
There are three basic places you can go to buy computer parts and software, and none of them involve going directly to the manufacturer. The top tier of distributors, Ingram Micro, Tech Data, Merisel and the like, sell everything you could ever want, but on basic clone computer hardware, they can't compete on price. These top distributors will get you going pretty quick on financing, and offer something called "floor planning" to finance purchases for retail operations, but since we aren't talking about opening a shop in prime Main Street space just yet, leave that thought on the back-burner. The main items you're likely to want from the big distributors early on include software (except operating systems, which you'll buy in OEM versions with the PC parts), printers and other brand name peripherals that your customers insist on.
The second source for computer parts are the importers/OEMs. Original Equipment Manufacturers (OEMs) in the PC business generally mean people who import or buy direct from domestic manufacturers and put together privately branded PCs. You might think this takes all the fun out of it for you, but there are myriad advantages. First of all, by sticking with OEMs who have been in business at least five years or so, there'll be a good chance the phone won't be disconnected when you call the next week. Second, this is all they do for a business, while your real business is being a small business. Third, it greatly simplifies the warranty and defective merchandise return process if you get whole PCs from one place, rather than scattering your parts orders across a half dozen low-ball vendors each week. Lastly, since OEMs want to sell computers in large numbers, if you stumble into a big sale before you have the organization or financing to handle it, you can cut a deal where they deliver to your customer and even send the bill. You show up and take the PCs out of the boxes, and you earn a handsome commission.
Finally there are the nickel-dime (meaning five million to ten million dollar annual revenue) importers and OEM wanna-be's. These are the outfits that will have the best pricing on stuff that you don't exactly want, but that you can make a profit selling. For a machine here and there, the risk isn't that great, though I tend to pay more attention to the brands of the actual components when buying them from folks who probably won't be around forever. It's best to settle quickly on one or two of these outfits, at least one of which is close enough for UPS ground to show up the next day. Inventory is a killer in the PC business, so being able to get stuff quickly without paying extra for overnight or second day shipping is a big plus. The biggest problem you'll encounter in dealing with these smaller operations is that due to their relatively low volume, you'll often end up buying a system that they've never built with exactly those parts before. When it doesn't work, they'll be happy to start swapping parts (with shipping costs and delays), but you're the one who will have to explain to your customer why the troubleshooting process seems so random.
How do you get in touch with these vendors, and should you invest time filling out paperwork for strategic alliances with everybody who is willing? It is definitely worth while to sign up with Ingram and Tech Data and jump through whatever hoops they request. These distributors will soon grant you company credit, which helps you establish credit with other vendors down the line. You should also pick one big name, like IBM or HP, that you can obtain through these distributors, and fill out the paperwork for whatever reseller program they happen to be pushing that month. This doesn't mean you can expect to open any doors selling brand-name hardware, but if you happen upon a business customer who likes you for your prompt and friendly service, you'll regret it if you aren't in a position to make the easy sale. The mid-tier OEMs and small importers will start contacting you, by phone or fax, as soon as you establish a buying persona in the trade. You can get a jump on being found by wholesalers by searching PriceWatch.com or calling the 800 numbers in PC magazines and asking if they have a wholesale operation in addition to mail-order retail. In the end, it takes a while to get established with vendors you can trust, and the smaller the number of suppliers you deal with, the better off you are. One resource I consider well worth the subscription cost is The Resellers Source Kit at www.rs-kit.com. The annual subscription price is $80 (you can buy a single issue for half that) and it includes over 1,500 true wholesalers, overgrown resellers, and liquidators, splendidly organized and updated every month.
This brings up an interesting exception to the "don't spend anything" rule of thumb that applies to doing business on a shoestring. If you can buy some reasonable service or information that may be critically important to the success of your business, AND it wouldn't build your useful skill base by doing this work yourself, spend the money. While learning more about taxes or marketing makes you a more valuable entrepreneur, spending hundreds of hours on the phone trying to build a database of potential vendors is a waste of time. Better to hang onto your day job one extra day and use the pay to get a one month jump on starting your own business.
The only real way to lower your cost on computer parts beyond the established pricing of your vendors is to bargain with them. Even the top tier distributors give their salespeople some flexibility on pricing. A fellow I used to work with would call up either Ingram or Tech Data and get a price on an item. Then he'd knock off $5 and call the other saying, "I got a price from your competitor of $X". It usually worked, though you need to have a certain type of personality to do that day in and day out. The OEMs and smaller importers are also flexible on price, but you won't find out without pushing them. There is a risk in pushing too hard, however, in that you'll never develop a good relationship with the salesperson, who needs to earn a living also. Salespeople are instrumental in expediting returns, rush shipments, and even getting you access to tech support. It's a hard balance to strike, but I usually come down on the side of establishing a good relationship and adjusting selling prices to compensate.
The fool's gold of purchasing is buying quantity to get lower pricing. This may work in some retail businesses, but not with computers. The shelf life for items like hard drives and memory is similar to that of fresh produce in the super market. Computer parts suffer from a type of spoilage I would characterize as premature obsolescence. New hardware is being released every month, and even if your customers don't push you for the latest thing, the emergence of new products causes the prices of the older products to fall as vendors who bought in quantity to get discounts try to unload them. The sole exception to this rule is the occasional shortages that show up in the spot market, particularly for memory, but these are entirely unpredictable and usually of a short duration. In summary, you should never buy more parts then you need to fill an order, though you might pop for some spare parts on very large orders to avoid delays.
The owner of an outfit I was working for around 15 years ago wanted to get good pricing by buying wholesale from Asia, so he ordered the minimum number of retail boxed mice he could to deal direct with the manufacturer. At the time, mice were fairly expensive, and since he had to buy over a thousand, this tied up several tens of thousands of dollars. Since we didn't really have an established retail channel and weren't selling anywhere near enough PCs to recover this investment in a reasonable amount of time, we decided to try one of the large indoor computer fairs that used to be quite common. All day Sunday, a couple of us stood behind a six foot table selling these mice for $35, which was the cheapest price at the show. I made the mistake of joking with one customer, who asked where we had obtained them so cheap, that they had fallen off a truck. Lost that sale, but we sold all the mice we brought, recovering the capital invested for more important purposes.
When you purchase parts from out-of-state, which you commonly will do unless you live in California or the Far East, you won't be charged sales tax. However, when you purchase parts within the state where your business is run, you'll need to register with the state and get a reseller tax ID. Actually, many out of state vendors will also require your reseller tax ID, either because they have an office in your state or because they require it from everybody. There are still four or five states left in America with no sales tax, for whom this doesn't apply. Vendors in your state may require a photocopy or fax of this certificate to drop the sales tax from your purchases. If you wonder why your state is being so generous and waiving sales tax on your purchase, it's because when you sell merchandise within the state, you'll be required to charge sales tax and turn it over to the state (and sometimes city), and they get very nasty if you forget. An excellent starting point for determining the requirements of your state is the Small Business Administration (SBA), a federal agency that promotes the development of small businesses with educational programs and loan guarantees www.sba.gov/starting.
Setting Prices (excerpt)
Establishing pricing comes after lining up vendors for a reason: You can't set your prices until you know how much you'll be paying for parts. If you listen to PC distributors, you'll hear them blowing a lot of smoke about selling on margins under 5% and making a living. What they're talking about is a PROFIT of 5%, figuring most costs up front. You have no way of knowing your costs up front, as you aren't even in business yet. To make a living selling and servicing PC hardware in the $100,000 to $1,000,000 a year range, I can offer a couple rules of thumb based on experience. If you are working out of your house, and you are very disciplined about charging for extras (that $50/hr+ field rate we keep mentioning, you never want to sell anything under 15 points. A 15 point margin isn't the same as "15% of", but a divisor. Take the real cost of the item you are selling, including shipping cost, and divide it by 0.85 (the 15 points comes from 1.00 - 0.15 = 0.85). This gives you a pre-tax sales price of $824 for a $700 investment in parts. If you have already jumped into a retail operation with a leased space and a helper of some sort, a more realistic margin is around 20 points (divide by 0.80) meaning that $700 PC must be sold for $875. These numbers are based on experience! If you can't at least reach these margins, you're running a money losing hobby, not a business. If you get involved with selling PCs for under $500 or $600, you better add another 5 points to the margins given above. Part of the profit you are trying to achieve is really a reserve against warranty service, and cheap PCs have at least as many problems and service calls associated with them as their more expensive brethren.
To drive the point home, let's say your town was starving for a new computer business, and you have no trouble doing $200,000 in hardware business your first year, exclusive of sales taxes. Some of your customers want the cheapest PC they can get, others buy screaming game machines, and your average selling price is $1000. This means you are delivering an average of four computers a week out of your small retail establishment and at a 20 point margin, your average cost is $800 per machine (800 / 0.8 = 1000). On hardware and software, your $200,000 in gross sales has brought you a gross profit of $40,000. Your triple net rent for 1000 sq ft in Anysmalltown, USA, along with all office expenses and insurance comes to $1,000 per month, or $12,000 for the year (you got a great deal, by the way). Your gross profit is now down to $28,000. If you had operated out of your house at a 15 point margin, your gross profit would have been $30,000, and allowing $2000 for business phone and similar office expenses, you end up at the same $28,000 for the year. This $28,000 does not include your mistakes, your car expenses, or any office equipment you felt you had to buy. Sure, you can write-off expenses, and for grins, we'll allow you $8000 worth, but that doesn't mean as much as you think in the end. Assuming you are functioning as a sole proprietor, you'll end up owing self-employment tax on $20,000, which amounts to about $3000 off the top, and you'll probably owe some State and Federal income tax, depending on your personal situation (kids, mortgage, etc.). The $8000 dollars in deductions we gave you were backed by real expenses so it's not money you have anymore; you did put miles on the car, buy a laser printer and a $500 ad in the local paper. On your $200,000 in sales, you're left with a little less than $17,000 to divide between you and the income tax man.
OK, you would have been happy with $34,000, but could you have done the over $400,000 in hardware business to get it? At our average selling price, you need to sell, deliver and service eight PCs a week. In order to sell $400,000 of product with a gross cost of over $300,000, you'll need a minimum of $25,000 in cash and credit available each month, and not all of your customers will pay within 30 days. Cash flow management means having the money or credit available to buy stuff to make more money, and it is a critical skill as you try to grow your business. Remember, you may have no sales all summer, then do well in October and November, tying up all your money. December rolls around, you have $100,000 of potential Christmas sales and no credit left to buy hardware until your invoices get paid! The point is, it's not so easy to just sell more to make more money.
Nobody wants to work for less than $17,000 a year (and no health insurance or benefits), so you're wondering if there's something wrong with our model. Well, we left out that high margin income you can expect to earn selling by your time once you're established as a local computer expert. This includes repairing PCs for people who bought them elsewhere; doing upgrades, where your labor cost is an expected line item; field service; software support; and training if you are so inclined. Well dressed techs from big companies may charge over $100 an hour for field service. When you're starting out, you're probably better off keeping your rates down in the $75 - $50/hr for field service and $50 - $35/hr for shop work, and getting the business. Now we see that if you can sell ten or fifteen hours of your time each week, you'll be adding over $25,000 a year in gross income. That's more than $20,000 after self-employment tax and extra expenses, getting your annual income back up into the high thirties. All this assumes that you're actually working the sixty or more hours a week that it will take to get there. Remember, most who try this business fail, because they never actually make these numbers. They don't charge enough for the machines they sell and they try to increase business by adding salaried staff who only increase the losses by selling more stuff at low margins.
The worst thing you can do is try to win customers on price. If you beat yourself up on price before you even try selling to customers, you're never going to make a living wage. Don't get stuck promising long warranties (over a year) that some OEMs will offer you. Those OEMs will be out of business long before that 3 year or 5 year warranty expires, and if you're still in business, you'll get stuck footing the bill. When you're a small business, the main thing you have to sell is YOU. Whether or not you feel in your heart that you're better than the competition, this is what you have to sell your customers on.
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