Are customers getting the best of Cisco and causing its downturn in margins?

In the never-ending game of discounts, customers seem to be winning and winning big.

Cisco's eroding margins has been a hot topic for discussion in many circles, particularly between partners and customers. Since the Cisco stock conference call and its Q2 results announcement, many people have spoken up on the margins and profit loss.

In my opinion, Cisco is making less gross margin on sales than they did in prior years due to discounts. Could this mean that customers are playing the Cisco discount game better than the Cisco account managers? Have customer watched and learned over the years and now know Cisco will do about anything to keep Cisco in the data center?

I posed this question to some people and received the same answer about every time, it is a combination of customers looking for better deals and knowing how to negotiate for them. Customers are using "bake-offs" between Cisco and a few competitors to see who has the best product for their network. But sometimes, the customer isn't really interested in other vendors other than Cisco and is doing the bake-off for negotiating reasons. Other times, the customer will pick the lowest price, even if it's not the best performing product in the bake-off.

Customers told me that they are looking out for their bottom line and are trying to get the best deals they can. But I posed a question to them asking why would you buy a product that is not the best in your network, in your bake-off testing or in analyst reports? They said if they can get a product for 10-15% cheaper than the others, they will sacrifice having the best product for saving money. A few said many times it is a political decision within the company due to executive relationships with Cisco. But it all comes back to the discount game. (Cisco Discount to Partners) (Cisco 50 to 70% off)

Many vendors cannot go beyond a certain price discount due to the price of the equipment, whether that is a company rule or a gross profit rule. Cisco seems to be the exception to this rule with some of the discounts customers have told me about.

One person pointed out to me, if Cisco is giving such big discounts, and it seems to be offering them across the board with customers and on most products, how can they still be making such huge gross profit margins on their products? Maybe it isn't, as this quarter's financial news seems to indicate.

Customers hear that Cisco has been losing market share and will give whatever discount necessary to win the business. So customers are using vendors against Cisco, maybe even inflating the discount that other vendors are giving them to obtain an even better discount from Cisco. Customers have learned that if you threaten Cisco with another vendor, invite another vendor in to the network to test, Cisco comes out of the woods to talk you away from that decision with discounts. But who is being hurt here the most, the Cisco shareholder who has no control over Cisco list pricing, discounts and gross margins or the customer who learned the game?

As someone told me, it is all about the game and it is never ending.

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Copyright © 2011 IDG Communications, Inc.

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