How is the Cisco 76% off Nexus sale going over with customers? Not well.

Over the last week I have received many emails about a story on the net. The story is all about Cisco giving Purdue University a 76% discount on the Nexus Product line. How they got to that number was a combination of Cisco math (discount, trade in on obsolete Cisco Switches) of which every customer by now is used to. The comments vary a great deal, I have listed them below and removed names.

“What does this say about Cisco list pricing if they give 76% off to a customer”

“We all know Cisco will still make 50% profit even on this 76% off deal due to price of manufacturing the product in foreign countries for pennies on the dollar”

“How bad for current customers who have purchased the Nexus product, they must feel bad when they see these discounts”

“Two things strike me as odd here Larry: 1) Cisco has promised Wall Street and its shareholders that they will improve gross margins, retain market share, and focus on core businesses.  I am not certain how well selling a single Nexus 7018 at 30% gross margin fits within this strategy. Every Cisco customer should now demand 76% off as a starting point in negotiations; otherwise they will simply be paying for over-priced sales people. 2) Worse though is the complacency and culpability of the IT department at Purdue, a public university.  The Nexus 7018 did not meet the power requirements of the RFP.  The Nexus 7018 does not meet the latency requirements of the RFP.  The Nexus 7018 was the highest priced solution presented in the RFP.  What was the real decision making criteria of this opportunity that invested public monies for underperforming infrastructure. “

“Cisco has really opened Pandora’s box now in the Cisco Discount Game, no matter the Cisco product the old rule of 42% off just went out the window. Every customer will try to get to at least 70% off”

“Being a Cisco stock holder to say I am not happy is an understatement, it is either leadership or bad product to force any company to offer such discounts to customer. Where is the value in being a stock holder when sales will be like this for the foreseeable future?”

“Really? How can they have such a high list cost when everyone gets 42% off on every sale? Now with 76% off what does that say about the list price and the discounts to customers? “

As you can see the comments vary a great deal from person to person, but what will Cisco do now? One person I talked to said “they are going to go from a solution company to a catalog company over night; the account manager will just be order takers. They will spend all of their time bargaining with customers on discounts of over 70% now.”

But one thing I was thinking about last night while on the phone, how are they going to get around the the cost of the product relevant to the profit they make on each product, relevant to the discounted and list price? I am not saying every vendor does not have this problem, but now that this discount is out in the open from an rfp, how will they respond?

Cisco has created a monster in this one deal; every customer will try to trade in any kind of old switch to get a discount like Purdue. But to Purdue University we give credit, they went from $1,094,793 to $254,600. They saved the university a great deal of money and that is commendable.

Can Chambers step out in front of this and fix the problem? Can he bring some order back to this discount game that Cisco plays so well? On the other hand Chamber just might let it ride as it seems they can manufacture product cheaper than other vendors in the space and even when giving 76% off will make a great deal of profit.

My friend who blogs also commented “Chambers is either going to win big with this, give huge discounts now to every customer and starve off other vendors who cannot match the pricing. Or he will not be able to battle the questions of how cheaper is this equipment to make and is it really better than other vendors.”

I think Cisco has started something that will bring down every vendor; every vendor is going to make less profit now. Many vendors will not survive, others will stick to their guns in pricing or will have to make sacrifices to match product cost, discount cost, margins and list pricing. Not to mention the partners, partners will not be able to make any profit due to discounts need for customer sale and will have to rely on professional services. Sales might just move back to a vendor only sales structure, just so the vendor can make money.

This is going to be a great developing story as other vendors chimes in with their comments.