It’s the discount game, have you been caught up in it and made a huge mistake?

Why discounts are not the best reason to buy a product.

So it is Interop time in New York City and I was not planning on attending as I have been busy with customers. But, as it happens, I am in New York this week presenting to customers. So, I was asked to come and have breakfast with a group of CXOs (four CEOs, two CFOs and seven CIOs) from New York, and enjoyed a good conversation with them. One of the topics of discussion: discounts.

The discount game is one that is more complicated than it often appears. Everyone said that, when looking at new products, price was the number one criteria. I told them that they were all dead wrong and they are playing the discount game. I gave them a scenario to talk about between themselves and then we would talk about it as a group.

If you are looking at a product and you have two main vendors who want the business, one gives you 55% off the list price. The other gives you 30% list price and they have a little bit of a high list price. Now the first vendor has shown a ROI of 16 months based on their numbers and vendor two, the one with the higher price, has shown a ROI of nine months. If you know that the higher priced vendor gives you a better ROI, would you still choose the vendor with the bigger discount? Let’s say the second vendor was recommended to you by industry analyst as the best solution, would you still pick the vendor with the high discount?

The problem I gave to them was an actual customer case I worked with for a customer who was looking to replace its phone system. I told the group that the ROI should be the first number to consider, and the features of the product, while the discount should be discounted completely. solution.

One CFO in the group asked why companies give such huge discounts then on the products. In my opinion, I would guess that the product only cost the company perhaps 19% of the list price to make (based on discount given and the margin needed by the vendors). The vendor posts the product at an outrageous list price based just so that it can offer very large discounts to customers. That’s why we call it the Discount Game. Vendors have customers programmed to get such huge discounts that if they don’t get it they go to another partner or vendor.

I advise customers to always look for the best ROI, and I've found many times that it doesn't come from the company that gave the biggest discount. Now this conversation came around to a blog written by Brad Reese on Cisco Subnet, where Cisco lost to HP. (The post said, "If you trade-in your Cisco equipment, HP ProCurve will take 20% off its list price.") many people asked me if this was a ROI or discount-based decision. I'll leave you to read the post and decide for yourself.

Let’s go back to the discount game and why the list price on network equipment is so high to allow huge discounts. When you buy a car, can you get 35% to 55% off the list price of a car? I am sure we all wish we could. I know I would love a new Porsche at 55% off list price. So why is network vendor pricing equipment so high? It is to get you involved in the discount, to enable the vendor to have a discussion to show you the value in the product.

So don’t get caught up in the discount game; if you do it will cost you more in the long run.

What you do you think of vendor pricing compared to discounts given? Do you think list pricing is too elevated compared to the average discount given to customers? Do they just throw darts on the wall to come up with a list price or roll some dice? Do you think list pricing is very misleading to customers since they are so high and unbelievable? I would like to hear what people think.

• Cisco
• Cisco
• Cisco offer price-matching discounts to existing customers in order to equal ProCurve prices
• HP
• pricing
• pricing scheme