The Fiction Of MSRP

In my 25 years as a consultant, my clients have tended to straddle the mythical line between small/midsize businesses and what vendors like to think of as true enterprises. Working both sides of the line that way has made it painfully obvious that the process of figuring out what some piece of kit will cost my client is very different depending on which market the item I'm spec-ing out is targeted to. While an SME customer buying one or two Dell servers expects to pay the price on the Dell website, saving Dell the cost of a sales call, vendors of products targeted for sale to the enterprise openly admit that no one pays list price.

I was speaking the other day with a vendor about its new enterprise storage appliance. Like many products in this category, the product is basically a Westmere Xeon server with 1TByte or 2TByte disk drives and, of course, the special sauce that is our friendly vendor's software. When they told me the list price was over $100,000, I was momentarily shocked.  After all, I could buy the hardware for $12,000 or  $13,000 from Dell. Even less if I bought a SuperMicro server and skipped buying Dell's 2:1 markup on 2TByte disks versus buying them from Newegg.

Of course, the vendor said its pricing was in line with competitors', and when I did a little bit of homework, I confirmed that the competitors' list prices were similarly in the low six figures. I also determined that 50% discounts were common in this product category, even for customers buying just one appliance. Large customers, good negotiators and those willing to play a little chicken with their sales reps by holding their orders till the last week of the quarter can get even bigger discounts.

Unfortunately, there are customers that get smaller discounts, and they're commonly government buyers. When I worked for an agency of the state of New York, I discovered that the state negotiated bulk contracts with major vendors like Dell and EMC. Unfortunately, I also discovered that, despite the huge volume of IT equipment the state bought every year, the discounts on these contracts were smaller than the discounts I negotiated for my commercial clients when they were buying a single Clariion. While I was allowed to negotiate deeper discounts, I'm sure IT guys at other state agencies assumed that the state people that are paid to negotiate had done a good job and just wrote their POs at the state contract price.

I've occasionally discussed this problem with vendors, and they've told me that every time a vendor tries to bring list price back in line with street pricing, they get huge pushbacks from their customers. Purchasing agents, it turns out, are evaluated in part by how big a discount they get from their vendors. High list prices and huge discounts, even when everyone gets the 30% discount just for showing up, make purchasing agents look good.