What is the core concept of the model? The pyramid model of Cisco Partners Program provides the partners with incentives to enlarge the sales volume. The major measure of discount level is according to the sales volume. The “Gold”, “Silver” and “Premier” status are awarded to resellers as they meet certain sales volume. Greater sales volume allows resellers to receive higher discounts on Cisco products (Gold 42%, Silver 40%, Premier 38%). This is typical in the market to increase market share because it is simple, effective and goal oriented.
What are your reactions to the “Pyramid” Model advanced in figure C of the case? The three-tier pyramid structure addresses only sales and discounts. It is dangerous that it ignores the service and other value-adding activities, which can assure higher margins and prevent vicious competition in a race to the bottom. Historically, prices could be maintained, venders could expand the market share while maintaining the profit by using the 3-tier pyramid structure. Currently, due to the entrances of new competitors, price wars are unavoidable.
In this case, Cisco has no advantages if they chose to engage in price war with those new competitors such as Huawei of China. Therefore Cisco needs to introduce new factors to maintain its leadership in the industry. As seen in the case, focusing on volume rather than value paired with the unique competitive situation of Cisco leads to what is called a “clash of domains”. Due to the high amount of resellers there was high inter-channel competition. As a result of Cisco’s pyramid model, telecommunication companies decided to enter the networking business, which made competition even more intensive.
Furthermore with the entrance of telecommunication companies entering the network business a grey market arose. To gain customers for their transport business Telecommunication companies sold Cisco products with wholesale prices. That lead to an accusation of “router dumping” by Cisco resellers and intensified the competition. Is there an alternative evolutionary model that Cisco should adopt? To solve the problems of the “Clash of Market Domains” we think that Cisco should focus on improving its design of satisfactory incentives for the resellers n order to achieve a better coordination. In reaction to the change of needs of the customers to a value oriented service requirement we consider Cisco to shift the volume-driven marketing strategy to a value-driven one. The focus should drift away from offering the cheapest product and focus on offering the best solution and value for the customer. Therefore the evaluation of resellers by volume should be changed to a benchmark of services offered. In addition to the 3-tier structure, Cisco can provide incentives that focus on services and value-adding activities.
The professional certification can not only be served as a criteria to benchmark the serving capability, but also increase the switching cost for incumbent users. This is because the reliability is usually considered most important in Enterprise Network. Failing to rule-out problems can result in big losses in money and credibility. Therefore reliability and after-sale services would be far more important considerations than price itself. The suggestions are summarized as follows. Partner Program StructureFigure C, Pyramid Model (see exhibit 3)New Program Structure (Figure A and exhibit 5)
TimeBefore 2001After 2001 Pricing & Services Volume-oriented, Discount level, and engineering services and supports are upon the sales volume of each customer and additional service is also based on sales revenue. The upper layer the larger volume and the better discounts and services. Value-Oriented Aim to satisfy each segment to its best value distribution Opportunity-based Value engagement model to engage reselling to selling cycle ASAP Feature3-tiers, go-to-market, one-seze-fits-all, strategy Quantity 5-tiers, market coverage, segment targeting strategy Quality
DifferencesCope with dot com crash Raise of Certification level Cut VAR from 6000 to 3000 3 main market segment: corporate, telecommunication and consumer markets In order to solve the channel conflicts Cisco should also create an information-intensive mechanism. Exchange of personnel to integrate the resellers as early as possible into the development of products and the pricing strategy could be one solution for the problem. That will allow the resellers to actively improve their situation which will have a positive affect on the channel communication and intra-channel relationships.
