| Imagine this scenario. You are a sales | | | | savings." Purchasing: "Would you mind if I use the |
| representative for Baker distributing. One of your | | | | fact that you got two competitive lower cost |
| long-time customers, Albertson Metals, operates a | | | | quotes to try to bring Baker's price down?" Plant: |
| mill that produces high nickel alloy ingots. Each | | | | "No problem, as long as you promise that we will |
| year, this mill purchases approximately $500,000 | | | | get a contract with Baker without losing any of |
| worth of MRO products such as bar conditioning | | | | the services and added value they have promised |
| wheels, flap wheels, grinding belts, cutoff wheels, | | | | us." Purchasing: "You have my guarantee." |
| steel shot and grit, and other products for the | | | | Scenario 2 -- Plant: "This proposal from Baker is |
| mill's laboratories. Unfortunately, you are usually | | | | great. We're going to save all kinds of costs and |
| able to obtain only about 30% of this business. | | | | solve all kinds of problems. I know they appear a |
| During the last six months, you have been | | | | little pricey, but the cost savings are worth it." |
| working intensively with the mill's management to | | | | Purchasing: "Have you looked at any |
| convince them of the value of developing an | | | | competitors?" Plant: "We've looked at two other |
| integrated supply arrangement with you. They | | | | competitors. They're almost as good as Baker |
| have reacted positively to your ideas and you | | | | and they are cheaper." Purchasing: "How much |
| have developed a proposal that you believe fits | | | | more do you think Baker is worth than the best |
| their needs perfectly. Among other things, you will: | | | | of the two competitors?" Plant: "We think they're |
| * manage Albertson's inventory. | | | | worth about 10% more." Purchasing: "O.K. We'll try |
| * stock all items with sufficient buffer stock to | | | | to get Baker down so that they're no more than |
| assure JIT availability. | | | | 10% above your best competitor, and of course |
| * supply Albertson with OSHA-certified safety | | | | we'll try to get them even lower than that. If we |
| seminars on appropriate topics to be mutually | | | | can't get them down, then we'll go with your No. |
| agreed upon. | | | | 2 choice." Plant: "Sounds good to me." |
| * provide 24 hour emergency delivery. | | | | Scenario 3 -- Plant: This proposal from Baker is |
| * invoice biweekly for items drawn from | | | | great. We're going to save all kinds of costs and |
| consignment. | | | | solve all kinds of problems. I know they appear a |
| You have submitted your proposal at a price that | | | | little pricey, but the cost savings are worth it." |
| you believe fairly compensates you for your high | | | | Purchasing: "Have you looked at any |
| level of service and for the special features | | | | competitors?" Plant: "We've looked at two other |
| included. | | | | competitors that can do the same thing Baker |
| A week later you call the plant and are told, "We | | | | can. They all appear to have the same quality and |
| got your proposal and it's excellent. However, we | | | | would produce the same cost savings." Purchasing: |
| have to refer anything of this magnitude to | | | | "Then you don't care which one we go with as |
| Corporate Purchasing." You call the Purchasing | | | | long as we get the best price." Plant: "Yes, they're |
| Department and speak to the buyer responsible | | | | basically the same, so go with the best price." |
| for this contract. He says, "You've submitted an | | | | The buyer will almost always want you to believe |
| excellent proposal, and obviously you have done | | | | that Scenario 3 is happening. But is it really? The |
| your homework. Unfortunately, we have | | | | profitability of your sale may depend on your |
| something of an embarrassment of riches here. | | | | ability to determine which scenario really is in |
| Two of your competitors also submitted excellent | | | | operation. |
| proposals. You should be aware that your pricing | | | | 3. Be brutally honest about the worth of your |
| is extremely high compared to your competitors. | | | | added value. If it comes down to a price |
| As a result, at this time your proposal really is not | | | | negotiation, your added value is worth only what |
| competitive." | | | | the buyer is actually willing to pay for it. Say, for |
| You explain to the buyer how you've worked | | | | example, that the only difference between you |
| with the plant for the last six months to develop | | | | and your prime competitor is that you have a |
| this proposal. You discuss at length your excellent | | | | better reputation in the marketplace. Is that of |
| service record and how you have gone the extra | | | | value? Of course. Is it important? Absolutely. Is it |
| mile to meet the plant's needs. The buyer | | | | worth anything? That depends on the buyer. If a |
| acknowledges this but says, "Your competitors | | | | one buyer says, I'm willing to pay 2% more to go |
| also have excellent service records but are willing | | | | with Company A because of their better |
| to meet our needs at a much lower cost." | | | | reputation, then it's worth 2% to that buyer. On |
| Did you see this coming? You worked hard to | | | | the other hand, if another buyer says, I'm not |
| meet your customer's needs. You solved | | | | willing to part with any hard, cold cash because of |
| problems with your customer. You anticipated a | | | | Company A's reputation, then for that buyer it is |
| win/win for everybody. Your goal was to avoid a | | | | not worth anything." |
| price negotiation by differentiating yourself and | | | | For each sale where you have one or more |
| focusing on your services and your added value | | | | potential competitors, you need to do a |
| to the customer. Now, at the last minute, price | | | | value-added analysis in order to figure out the |
| rears its ugly head. In fact, the purchasing agent | | | | most the buyer would pay you vs. your |
| says that price is the determining factor. | | | | competitor. Let's make up a simple example |
| What do you do now? What should you have | | | | where you have just one competitor, Company |
| done throughout the sales process to prepare for | | | | A, and let's assume there are just four different |
| the possibility of a serious price negotiation? | | | | components of value: service, reputation, delivery, |
| In our sales negotiation training programs we | | | | and problem solving ability. |
| stress four key steps that will greatly improve | | | | Based on your knowledge of the customer and |
| your chances of making that sale while | | | | the competition, you believe the customer thinks |
| successfully negotiating to maintain your margins. | | | | that you have a better reputation, provide better |
| 1. Be prepared for a price negotiation but don't | | | | service and have better problem solving |
| lead with your wallet. | | | | capabilities, but that your competitor is a little |
| 2. Think like the buyer. | | | | better on delivery. Furthermore, although your |
| 3. Be brutally honest with yourself as to what | | | | customer likes your reputation, they won't pay |
| your added value is really worth. | | | | more for it. They like your service and feel that's |
| 4. Be aware that the negotiation starts when you | | | | worth up to 2% more. They believe that your |
| say hello. | | | | problem solving capability has helped them |
| Let's look at each step. | | | | overcome significant difficulties and that that's |
| 1. Be prepared for a price negotiation but don't | | | | worth 4% more. On the other hand, you have |
| lead with your wallet. As buying organizations | | | | had some delivery problems. While not fatal |
| have become more sophisticated, many realize | | | | problems, the customer would be willing to pay |
| that the key factor is not price but total cost. | | | | your competitor up to 2% more for their better |
| Therefore, it is sometimes possible to avoid price | | | | delivery. |
| negotiations if the customer sees enough value. | | | | Your value-added analysis would look like this: |
| We know of one manufacturer who was | | | | Value Added Item Vs. Company "A" and The |
| approached by an automobile company to take | | | | Most Your Customer Would Pay Extra for That |
| over production of certain parts because their | | | | Added Value |
| current supplier was not meeting expectations. | | | | Reputation 0%; |
| The manufacturer called in its machine tool | | | | Service 2%; |
| distributor with whom they had had a very good | | | | Problem Solving 4%; |
| relationship. They said to the machine tool | | | | Delivery (-2%) |
| distributor, "We promised the automobile | | | | Under this scenario, your customer would be |
| manufacturer that we could do it. Now it's up to | | | | willing to pay you up to 4% more than your |
| you to make it happen. We're not here to | | | | competitor. Of course your customer will often |
| negotiate the price -- just make it work." The | | | | say, as our Albertson purchasing agent did, "You |
| distributor sold $10 million worth of machine tools | | | | guys are all the same. You all provide good quality |
| at list price, including a full turnkey operation and | | | | except your delivery isn't very good. You've got |
| the placement of a full time technician at the | | | | to get much more competitive with your pricing." |
| manufacturer's location. | | | | If you've done the value-added analysis and it's |
| There's a lesson to be learned: If you think there | | | | accurate or reasonably accurate, you can see |
| is a possibility that you can make the sale based | | | | behind the purchasing agent's mask to what is |
| on your added value and services, try to leave | | | | really going on. |
| price out of the discussion. Don't start with price | | | | 4.The negotiation starts when you say hello. At |
| concessions or discounts but focus on the added | | | | this point you may be saying, "Everything you say |
| value. | | | | is true but if I'm the Baker sales representative |
| On the other hand, with today's ferocious | | | | talking to the Albertson purchasing agent and he |
| pressures to reduce costs, buyers never forget | | | | says to me, 'Your competitors are lower and you |
| that price is an important component of cost. | | | | have got to cut your price,' what do I do now? |
| Usually, buyers will want to have the best of both | | | | That purchasing agent isn't going to tell me their |
| worlds. They want you to solve their problems, | | | | real scenario, what they said to each other, or |
| add value, reduce their costs, and in addition, give | | | | what they really think our added value is worth |
| them a better price, which further reduces their | | | | vs. our competitors." |
| costs. Don't be surprised, don't be shocked, and | | | | Correct. If the first time you thought that there |
| don't be hurt. That's just the way the game is | | | | might be a price negotiation was when you were |
| often played. As you start the process, you need | | | | talking to the Albertson purchasing agent, it's too |
| to move forward in such a way that while you | | | | late. You don't have the information you need, |
| don't invite a price negotiation, if there is one, | | | | and it's going to be difficult to get it. |
| you're prepared. | | | | And that takes us back to our first point. Be |
| 2.Think like the buyer. To negotiate effectively, | | | | prepared for a price negotiation while you try to |
| take up residence in the buyer's mind. Say to | | | | avoid one. The negotiation starts when you say |
| yourself, what might actually be going on vs. what | | | | hello. The time to start finding out who potential |
| they're telling me? What they say may be the | | | | competitors might be, how your customer views |
| least important information. What they say to | | | | them vs. you, the problems they've had with |
| each other and what they're thinking is the key. | | | | competitors, whether anybody can do as good a |
| Let's go back to Albertson. We could imagine | | | | job as you can, etc., etc., is from the very |
| three different scenarios. | | | | beginning of your discussions with your customer. |
| Scenario 1 -- Plant: "This proposal from Baker is | | | | Have as many contacts with your customer and |
| great. We're going to save all kinds of costs and | | | | with as many people in your customer's shop as |
| solve all kinds of problems. I know they appear a | | | | possible. Ask direct questions, indirect questions, |
| little pricey, but the cost savings are worth it." | | | | feel people out gently, and try to get a picture of |
| Purchasing: "Have you looked at any | | | | their whole situation. |
| competitors?" Plant: "We've looked at two who | | | | Prepare vigorously for a price negotiation, and at |
| say they can do it and have offered a much | | | | the same time do everything that you can to |
| lower price, but their services really aren't there | | | | avoid one. |
| and we don't believe they can produce the cost | | | | |