Cisco Pads Router, Switch Profitability with Rebates

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Under new program, solution providers will receive incentives for closing sales of commodity infrastructure gear. Cisco estimates that the refresh opportunity totals more than $40 (£28) billion.

After announcing stinging drops in hardware sales in January, Cisco Systems is relaunching rebate incentives designed to stimulate solution provider sales of routers, switches and core networking equipment.

Under the plan originally unveiled in December 2008, solution providers that close sales on routers will receive a 5 percent rebate and sales on switches will receive a 10 percent rebate. The rebates are designed to pad the profitability of the products that typically have a margin ranging from 4 percent to 12 percent of the recommended sales price.

The rebate program is only open to U.S. sales and solution providers. Cisco isn’t saying when the rebate program will be extended to Canada and other regions.

While end users—particularly companies in financial services, manufacturing and retail—have curtailed new IT spending, Cisco believes there’s a huge opportunity for refreshing the core of the IT infrastructure. By its estimates, more than $40 (£28) billion worth of infrastructure equipment currently deployed, of which slightly more than one-half is at the end of its service life.

In theory, that translates into a sales opportunity, Cisco executives say, because businesses will need to modernise their network infrastructures for post-recession opportunities.

“We and our partners need to help their customers realise the opportunity so they can prepare for the future,” says Wendy Bahr, senior vice president of Cisco’s U.S. and Canada channels.

Cisco, the world’s largest networking equipment manufacturer, has spent the last several years diversifying its product portfolio with “advanced technologies,” such as logical security, physical security, unified communications and telepresence. Recently, it leaked intentions of launching server products to compete against vendors such as Hewlett-Packard, Dell and IBM in the data centre.

However, advanced technologies only comprise around 30 percent of Cisco’s gross revenue, with the balance coming from core—and largely commoditised—routers and switches. In its January earnings report, Cisco reported a sharp drop in forecasted revenue—15 percent to 20 percent—mostly in hardware sales.

Cisco says its emerging and advanced technologies are growing at a strong pace, but represent a smaller amount of the overall revenue stream and are not offsetting declines in core product sales. This led some solution providers to speculate that Cisco’s rebate program is designed to spur infrastructure product sales that still comprise the bulk of its business.

Will the rebate program, with its promise of augmenting partner profit margins, motivate solution providers to push routers and switches? Solution providers attending the Velocity marketing conference in Miami Beach, Florida., give a qualified “maybe.”

“If the customer is willing to buy at the listed price point, it works fine. But if you have to go below the floor, you won’t get the benefit of the rebate,” Jay Kirby, vice president of sales at Troubadour, a Houston-based solution provider and Cisco partner.

Working against Cisco’s favor are the low margins on switches and routers, and end users’ tendency to extend the service of network hardware beyond its recommended or depreciated operational service life, which is typically three to five years.

Cisco is pushing financing options that are designed to give end users options for acquiring new equipment and remove sales objections and obstacles slowing solution provider sales. One of the key benefits of the financing options is built-in sales opportunities when loans and leases come to term. Cisco is providing its partners with financing tracking reports so they know when to approach their customers about replacing leased or obsolete equipment.

“If the equipment is in their environment and working, you have to give the customer a compelling reason to make the switch,” Bahr said. “Think about the compelling event at 3 to 5 years when the financing is up.”

While having the financing options and muscle of Cisco Capital—the vendor’s financial services division—behind them and their deals, they say customers are not asking for or wanting  financing services for equipment purchases or leasing.

“Clients that have been leasing will continue to lease. And those that have been buying product won’t be interested in financing,” Kirby said.