Top Trends That Shaped Business in 2017
The year 2017 was marked by a significant decline in profit margin for most of the security market players in Russia. That resulted from deficient demand, oversupply and emerging competition from adjacent markets including IT companies and large online retailers.
Seeking to attract customers, many local security suppliers believed the only strategy they could stick to was dumping which led to a massive fall in prices. Sales volume was changing diversely for different market players: vendors with substantial sales volumes were able to gain market shares while bringing down prices.
The market saw income redistribution. The mid-end segment decreased drastically. There was a rapid growth in the low-end segment geared by products offering basic functionality and aimed at the mass market. However, the budget market was nearly impossible to compete in due to low profit margins and higher commoditisation caused by the lack of qualitative product differentiation. The high-end market segment featuring products with exceptional value and advanced functionality to meet exacting customer expectations improved its volume performance. Customer spendings rapidly shifted to large and very large installations.
Customer experience in the consumer goods industry is becoming more relevant in the B2B context. Both resellers and end-users are expecting security equipment to be easy to operate; the completeness of solution, simplicity of installation and management are becoming more important than technical specifications. That's why security products assembled in the same factory but stuffed with different firmware vary in functionality and accordingly in popularity among customers. If the difference in features isn't as critical as the gap between the prices of two products is, the average customer will choose a cheeper product even though professionals understand the difference between, say, Sony sensors and Chinese replicas. Mikhail Byaly, General Manager, Active-SB
Changes in Distribution
Distribution chains are getting shorter. Many Russian security manufacturers are ready to sell directly to end-users leaving some former distribution partners on the outside.
Consumer electronics companies are trying to grab a piece of the pie on the distribution part of the security business. Both large security projects and distribution are attractive to entrants from the IT industry who are used to lower profit margin than security incumbents have been so far operating at. Engage by no commitments with vendors, a growing number of online retailers are heavily competing on price.
In order to maintain market share, sales channels often take unconventional actions such as simultaneously offer their potential customers security solutions that fall into different price-segments. If the customer wants to save money, they choose a lower-cost option; if they are ready to invest in quality and reliability – there is a more expensive alternative at hand. Security solutions are frequently sold with additional discounts in case of annual maintenance contracts. Resellers also revise their product portfolios in favour of brands with a solid integration strategy.
Sales partners cut costs by removing products with similar prices and functionality, in other words duplicating each other, from their portfolio. They also dispose of solutions with a low profit margin and outdated features. Preference is shown for products based on advanced and emerging technology that are likely to create their own market niche. Alexey Ginze, PR Director, AAM Systems
Commercial sales have reached a stagnation; profit margin and sale volumes are declining. It's distributors who expanding their efforts with regional sales through opening regional offices, supporting their sales partners, providing them with discounts they are unable to get from vendors directly, and supplying stocks increase business volume and market share. All of those measures make the supply chain more efficient, and the lower-margin volume goes up. Another case for security vendors to increase sales volume in the current context is to win large-scale projects together with their partners such as system integrators and telecom operators who deliver a service platform for projects like safe cities.
A growing number of security vendors and large distributors offer engineering support to their sales partners. Security systems have become extremely complicated, and the value that end-users expect from implementing certain technology influences their decision-making more than having any specific sensor or device on the system. They understand that an extra video surveillance camera is additional operating expenses; customers judge with a critical mind and require more expertise from vendors to support their decisions.
Technology expertise is normally not very well shared across the supply chain, and vendors vary in approaching this challenge. Some of them make lower demands on their sales partners providing them with overall engineering support, they tell them – just bring us a customer. Others educate their sales channels so they could run projects on their own. Still others try to shift their sales partners to be more of architects and engineers with universal skills. Yet, the requested transformation is too difficult for traditional resellers or security installers, virtually it's a different type of business. The absence of consulting engineering practice on the Russian security market sticks out in particular. Why shall the end-user have to be so overloaded with technical aspects and make so many decisions? Why don't they hire professionals instead who don't sell any specific system but design a system architecture and minimize any further risks? Andrey Miroshkin, CEO, Groteck Business Media
As one of the major challenges currently faced by technology suppliers is increasing pressure to demonstrate TCO, there is a market niche rarely spoken about – a niche of after-sale service contracts. The Russian security market has seen cases when companies would close up their distribution business to fully focus on system maintenance. That type of contracts shall be addressed as an easy source of recurring revenue.
to be continued...