Supplies business model
HP’s (HPQ) Printing segment returned to revenue growth in fiscal 3Q17, driven by a strong performance in its Supplies vertical. Supplies accounted for 66.0% of its total Printing revenue in fiscal 3Q17. CFO (chief financial officer) Cathie Lesjak said that “a big portion of the profit is coming from the supplies, because we typically have a business model where you place the units at very low margins or negative margins and you basically then get the supplies annuity to give you a positive NPV.”
HP has a Four Box Model to stabilize its Supplies segment revenue on a constant currency basis. The first driver is to place positive NPV (net present value) units, whereas the second driver is to ensure higher usage of printer hardware units. The A3 space enables HP to achieve its goal of higher usage since these printers consume a lot of supplies. The third is market share supply, which focuses on driving HP-branded supplies. Then comes pricing of products in which HP ensures the exact price point to maximize profit without impacting demand.
Channel inventory was reduced last year
HP expected its Supplies segment revenue to stabilize by the end of fiscal 2017. It changed its sales supplies model last year and reduced inventory significantly in fiscal 3Q16 and fiscal 4Q16, which helped the company manage discounts.