Relying on hardware sales alone could endanger sustainability of technology sales for farm equipment dealers.
By all accounts, it’s been a prolonged period of profitability for precision farming dealers, built primarily on sales of hardware products. With disposable income, farm customers flocked to dealerships to add technology to their machinery.
But entering 2014, some dealers are forecasting that customers may pump the brakes on hardware purchases, due in part to a combination of lower corn prices and market saturation.
“I’d be surprised if we didn’t see flat to a slight drop in sales because of those factors,” says Darin Kennelly, precision farming specialist with Birkey’s Farm Stores, a Case IH dealership network based in Illinois.
Will corn prices hovering near $4 a bushel, compared to nearly double that in 2012, and increased competition among precision manufacturers, signal a bottoming out of the precision hardware market?
Not necessarily. But Kennelly and other dealers are adjusting their strategic plans to ensure long-term success of their precision farming business.
This includes an ongoing shift from relying on hardware sales as a stand-alone revenue source to more service-based offerings. Birkey’s recently implemented precision service packages as a way to partially supplement slower hardware sales and will proactively promote them this winter to customers.
“I see precision farming moving more into a service-related business,” Kennelly says. “If precision becomes less parts driven and more service focused, and we’re not charging for that service, then we’re in trouble. If it’s not making money, then that precision department dies.”
Kennelly says he doesn’t expect service packages will supplement all of the revenue generated by hardware sales, simply because those sales have been so robust. However, developing a perpetual revenue stream provides protection against slower sales of hardware.
Another contributing factor to potentially slower hardware sales, is that more of it is coming factory installed on new farm equipment, meaning less opportunity for dealers to sell technology as separate pieces to customers.
“We’ve struggled for the last 2 years trying to figure out what our place is as an iron dealer in this whole precision ag arena,” says Ken Diller, precision farming manager at Hoober Inc., a Case IH dealership network based in Pennsylvania. “For the last 7 or 8 years, we’ve just hammered away on hardware, hardware, hardware.
“We’ve made a good living on that, but as I start to look forward, there’s going to come a time when we can’t live on hardware sales because it’s all going to come from the factory.”
Kennelly agrees and suggests that at some point, precision hardware will become more of an OEM solution. “When technology comes with the tractor, there’s not a lot of parts transfer, not a lot of parts sales,” he says. “It’s really come down to wholegoods more than anything.”
But there is still a need for service, and dealers are gradually getting customers accustomed to paying for precision support, whether it’s on-farm visits, or over the phone assistance.
Diller admits that it’s a “tug of war” especially with longtime customers when it comes charging for precision service.
“We’ve created this monster on our own because for years everyone has just supported everything and we’ve just given away all this time,” he says. “I see all of our cell phone minutes and all of our cell phone bills, and I know what kind of time we are spending on the phone. We have to bill for that time. We can’t give that time away.”
Diller foresees an evolution in precision ag similar to what took place with consumer support in the IT industry.
“When you have a problem with your computer, the first question tech support asks is, ‘Do you have a maintenance agreement with us?’ If you don’t, they say, ‘Give me a credit card,’” Diller says. “That’s what it’s going to come down to with precision service.”