A friend of mine recently visited Thailand and proudly told me about a shopping experience he had buying an item worth $75 for only $25. He was glad he had negotiated (another tourist had bought the same product for the full $75).
We have a saying: “It is the best negotiators that get the best price, not the best customers.” For example, while working for a client in the service industry, we found that the volume discounts extended to customers did not correspond to actual volumes purchased. In fact, customers who were better at negotiating with the company enjoyed noticeably higher discount levels than customers purchasing similar volumes. These customers engaged in tougher and more frequent negotiations with the sales team and relied on a number of tactics. A favourite negotiation tactic: provide only a small portion of business at the beginning of their relationship, using the “carrot” of potential follow-up business as an excuse to push for a price reduction. This pattern of revenue leakage was consistent in both the customer acquisition and post-acquisition phases. In dealing with these accounts, the sales team believed that it was more beneficial to look for the pound — another customer acquisition — than to fight for the penny.
Good negotiation is a commendable talent, but businesses need the skills to deal with good negotiators. Here are some recommendations:
Focus on pricing policies and pricing infrastructure
Protecting your profitability from good negotiators requires ardent compliance to pricing policies, a flexible pricing infrastructure and the ability to say “no” — arguably the most important word for pricing to customers who wish to operate outside of your policies.
Most suppliers sign contracts with their customers but have poor policies or practices to ensure compliance with the contract terms (i.e., terms and conditions). Once a contract is set up, it generally is filed away, and both the customer and the supplier lose track of the terms. One way to deal with the shrewd negotiators is to ensure adherence to the T&Cs. One of our clients had an agreement with a large customer to ship products once a month. Upon further review, it was found that the customer was placing orders weekly, and no delivery charges were being applied. As soon as a charge was applied for these non-standard orders the customer ceased to place them, leading to significant savings.
An adequate pricing infrastructure is essential to ensure compliance. Pricing infrastructure is comprised of a well knitted unit of processes, people, systems, structure and performance management objectives. Some might say that infrastructure investment can be costly. However even a 1% improvement in price can typically improve profitability by as much as 12.5%, so achieving payback is usually very fast.
Lastly, and perhaps most importantly, strong management support is needed to stick to your guns and reject customer discount requests that might sidestep pricing policies.
Determine your prices based on the value delivered
Product and service prices, discounts and incentives should be set in accordance with the value derived by the customer, not solely by the importance of the customer to your business. Armed with insight into your customers’ value perceptions, you are able to charge the right price. When faced with a customer who is negotiating aggressively, we have seen many sales people successfully withstand the pressure by highlighting the benefits of the product and quantifying its value proposition. The more the discussion focuses on the value, the better your chances of negotiating a higher price and minimizing discounts.
Develop multiple offerings and price points
A very effective tactic for handling aggressive negotiators is to have multiple equal offers (MEOs). A leading company in the warehouse industry has developed different offers for customers with varying levels of price sensitivity. During negotiations, if a customer did not want to pay for the value-added services (e.g., 24-hour access, strict air temperature controls), another offer with fewer value-added services was presented (e.g., 9-5 access, less stringent temperature controls, etc.). This enables the sales organization to adjust the value to the price rather than just focus on price concessions. In order to offer multiple offers at different price points, suppliers need to tweak the value of the offering and create a flexible pricing structure that helps to understand price-value trade-offs between various offers. Successfully implementing this strategy led to $30 million in margin for this warehousing company.
In summary, be sure you are not leaving money on the table with tough negotiators. Prepare yourself to more successfully play the price-value game and follow through with compliance adherence. Well-constructed value offers help to provide the right price to the right customer. The best customer should get the best value, and an organization should create that differentiation for long term profitability.
This story originally appeared in the Financial Post on Aug. 20, 2012.