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The real story behind the so called "free service and supplies" that you get with your copier equipment lease!
There will, most likely, be several different reactions from readers of this article. Some will snicker because they're already aware of whats going on and can't understand why we took the time to explain what they thought every one else already knew. Others will refuse to believe that this information is true because they are currently involved in a lease with "free service and supplies" and don't want to accept the truth. But for those of you who prefer to bask in the true light of reality, we give you the following information with regard to the so-called free service and supplies that you get with your copier lease.
How it began.
Once upon a time, when the copier equipment industry was young, (circa 1968-197?), a dealership would sell a copier to a business and after a ninety (90) day parts and service guarantee, would maintain the equipment on a per-call basis for service and parts or would offer the customer a service contract. The customer would buy the toner supplies separately as they needed them.
The early days of the copier industry was the Wild, Wild West when it came to service. Keep in mind that you are and always have been dealer's customer and the dealer has always been the manufacturers' customer. Therefore, each and every dealer was free to write their own terms and conditions on a retail servicing agreement without having to answer to the manufacturer. Some servicing contracts were for service labor only and many dealers would rape the customer for parts by offering their techs a salary bonus for parts sold. Some servicing contracts covered labor and parts but excluded the so-called consumable parts such as fuser parts, drums, blades and developers which they marked up 300% because the manufacturers couldn't say anything to their dealers who were, individually, pushing, hundreds of their "boxes." Eventually the business public got savvy and started demanding that the dealers write them all inclusive service contracts.
During this same period, the concept of equipment leasing was only for heavy industrial equipment. Office equipment was only leased to major corporations and institutions who took in hundreds of thousands of dollars worth of machinery. But eventually, the leasing industry started to make financing available to small businesses. This was a blessing to small businesses that needed the technology but couldn't afford to purchase the equipment outright. Of course the copier salesmen latched on to this source of financing and did their best to convince the business public to lease the machinery, rather than buy it, in order to stay ahead of the emerging technology. At that time you'd pay the leasing company for the use of the equipment but still pay the vendor separately for a service contract. You would also purchase supplies as you needed them on a separate basis. But, by the late 1980's to early 1990's the industry started to evolve in a way unfavorable to the dealers.
The winds of change...
By the late 1980's and early 1990's, independent service providers were starting to take root. These were the former service managers for the dealerships that were fed up with (in our opinion) their exploitive wages and were establishing themselves as independent's in an effort to tap into what had become the lucrative servicing end of the copier equipment industry. Furthermore, by the mid to late 1990's, many businesses were starting to buy their toner supplies off the Internet from companies that were selling marginally above their bulk wholesale cost out of low-rent warehouses using undocumented aliens to pack and ship these supplies. This was causing a major headache for the dealers. Even before the early 1990's the competition to sell copier equipment had become so competitive that dealers were happy to get 25 % above their cost. That's why the service and supplies end of the business had become so important to them. When they realized that they were losing a lot of the service business to independent service providers and the supplies business to Internet retailers, they needed a way to wrap up all of this business in one neat bundle.
By the late 1990's some marketing genius, (we don't know who it was) came up with a scheme to solve this problem for the dealers. Today, dealers don't want to sell equipment. They want to lease it with "free service and toner supplies." How is this done? Amazingly, it's done with the full cooperation of the business public.
The mechanics of how it works!
Now, when a copier equipment salesman approaches your business, they don't bore you with the details of how much the equipment costs or how much the service contract and the supplies cost. Instead, they establish their dealership's credentials and present the equipment that they feel will fill your needs. They tell you that the deal includes "free service and toner" and give you a monthly cost based on a lease. You're only decision is to decide whether or not the equipment will serve your needs and whether or not you can afford the monthly payment. Simple as that! While not everyone buys into this sales approach, it seems that most do! But if the customer is not going to demand that the salesman break down the monthly cost into components, then they are unaware that the monthly lease figure is actually based on the discounted sale price of the machine, plus the amount the the dealer would normally charge for a service contract and supplies for the entire duration of the lease. In other words, the dealer not only gets the financial institution to pay them for the equipment but also gets them to pay them up-front for all of the service and supplies. The net affect is that you end up paying finance charges on not just the equipment but also for the service and supplies when you were previously paying for it on an annual or even semi-annual basis without a finance charge! So why are the dealers not up front about what we just revealed?
Simply put, the leasing companies don't want to be caught in the middle if there is ever an equipment performance issue. So, in order to protect the leasing companies from customers who would default on a lease agreement over a service and performance issue, the dealers bundle the service and supplies costs into the sale price of the equipment lease and tell the customer that the free service and supplies that they are getting in the deal has nothing to do with their lease payments. As a matter of fact, we have never seen an office equipment lease agreement that didn't state up-front that the leasing company wasn't responsible for the performance of the equipment. You agree, when you sign the lease, that the performance of the equipment is strictly between you and the equipment vendor. What's actually incredible about this who thing is how quickly the business public embraced this way of doing business. Ironically, those business people who were savvy enough to realize what was really going on went along with it anyway because it seemed like a great way to get the equipment, service and supplies financed into one monthly payment, especially during a time of cheap money. It didn't seem to bother them that they were not only paying for the financing on the machine but were also paying for the financing on the service and supplies when previously, this wasn't the case.
You may find it interesting to know that we have been talking about this to business people for years. Some find it informative and some don't care. As one lawyer once said; whether or not he's actually getting his monies worth out of his copier lease is of no concern to him. Every single day his law firm is open for business, he and his partners bill out, between breakfast and lunch, more than the amount of the monthly copier lease. If you agree with the lawyer then we apologize for wasting your time with this article.
The downside to this idea...
The downside of having the service and supplies bundled into the cost of the your lease is that if you are truly unhappy with the service from the vendor, you may go to another service provider, but then you are actually paying twice for that service! You can't default on the lease because you signed a legally binding agreement to take up service issues with the original vendor. And if you do go somewhere elso for service, the leaing company is not going to give you back the service and supplies part of your money because the understanding from the start is that the dealer is providing you with service and supplies for free.
Another disadvantage of having the cost of the service and supplies built into the lease is that your cost per-copy could skyrocket if you experience a business turndown. What do we mean by that? Well, if the dealer is going to give you "free" service and supplies with the lease, they are not going to allow you to run the copier like a printing press. All agreements that include "free service and supplies" will also limit you to the number of copies you can make during the term of the lease. That number is usually based on the copy volume that you did on your last copier. If you experience a prolonged business downturn and your copy volume goes way down, then your stuck making lease payments which you are now aware, not only includes the cost of the equipment but also the cost of the so-called "free" service and supplies which you are now-not-using. If you pay for your service and supplies contract seperately from the copier lease, then you can renegotiate your service contract from year to year based on your actual usage!
Nobody felt the adverse affects of equipment leasing with so-called free service and supplies more than did the mortgage industry. When these guys were riding high, they were leasing high-end, high volume equipment based on what their copy volume was two years ago. Now that their copy volume is one-fifth of what it was two years ago, the ones that are still in business are stuck paying the copier lease which includes the cost of service and supplies that they are no longer using!
Do you want us to spell it out?
If you were to purchase a new machine outright, then the dealer would have to give you a competitive dollar figure. Let's say $6500.00. Then, you'd get a separate price for an annual all inclusive maintenance agreement and pay for toner as you needed it. Just for the sake of this article, let's say that you chose to have your toner supplies added into you maintenance agreement. The dealer will charge you 1.6 cents per copy. The service contract is written for one year or 80,000 copies, whichever comes first. The 80,000 copies per year is an average of what you did annually on your old copier for the past three years. Now, that's 80,000 copies X 1.6 cents = $1,2800.00 per year for toner and service. But let's say that at the end of the first year you only did 60,000 copies. The dealer is not going to credit you (roll over) 20,000 copies towards the following years contract but will write the next years contract for 60,000 copies X 1.6 cents = $960.00.
If you don't want to purchase the equipment outright, you or the dealer could arrange financing on the $6500.00 value of the equipment. You'd still have the flexibility of paying for service and supplies on an annual basis based on your actual useage! But if you go for the "free service and toner" deal then you are allowing the dealer to add onto the $6500.00 price of the equipment what would be their normal charge for a service and supplies contract based on the 80,000 copies per year that you were doing on your old machine before the initiation of the lease on the new one. If you took a three year lease, that would be 80,000 copies per year X 1.6 cents per copy = $1280 X 3 years = $3840 added onto the $6500.00 price of the copier for a total of $10,340. You'd not only be paying for the financing of the equipment but you'd also be paying for the financing on the service and supplies. You must keep in mind that in order to protect the leasing company, the dealer will deny that they are adding the service and supplies onto the $6500.00. They would simply say that the lease payment is such and such per month and as part of the "deal," during the 36 month term of the lease they will be providing you with "free service and toner" for up to 240,000 copies. If you actually end up doing the 240,000 copies then the only concern you have is that you had to pay the financing charge on the service and supplies. But if you send the copier back to the leasing company after three years and realized that due to changing business conditions you only did 150,000 copies, then your facing the realization that you lost 90,000 copies X 1.6 cents per copy = $1440.00 plus the financing on that amount. If you can afford to blow off $1400 then we've really wasted your time with this article. In any case, you now now the truth about the so-called free service and supplies with the lease.