The Margin Migraine
CEOs who understand Channel Economics 101 know profit margin is dictated by the product discount levels set by the vendor, as well as the number and type of partners involved and how each type of partner is compensated. It takes a strong and disciplined channel program to ensure stable margins. In boom times, undisciplined channel models can go unnoticed. The stingy IT spending environment, however, has exposed cracks in more than a few of these programs. Nowhere are those cracks more evident than at Cisco Systems.
The product profit margin migraine that Cisco solution providers are experiencing right now is front and center in this week's cover story by CRN Infrastructure Editor Larry Hooper.
Cisco CEO John Chambers told CRN that he is finally going to fix the widespread practice of carriers selling Cisco network gear below cost. The market havoc that financially troubled telecom carriers have wreaked on Cisco solution providers through this product dumping is unconscionable.
The carriers are dumping Cisco gear in a desperate bid to keep afloat in a brutal telecom market and to win the lucrative long-term recurring revenue from service contracts.
Some years ago, Japanese companies used the same product dumping tactics in an attempt to corner the memory chip market,until the U.S. government stepped in to restrict the practice. Product tying also was at the heart of an antitrust case against computer giant IBM some years ago. IBM Global Services still bundles products with services in a way that has raised more than a few eyebrows among competing solution providers.
The only way for solution providers to battle this phenomenon is to employ their own creative bundling and tying. A full suite of products and services wrapped together as an industrial-strength solution always means bigger profit margins.
Solution providers that introduce annuity-based models that meet the needs of their customers are going to find themselves winning business, despite the carriers' tactics. You can't fix an undisciplined channel program, but you can fight fire with fire.
Who is doing it right? Let me know at (781) 839-1221 or via e-mail at [email protected].