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Newsletter: December 15, 2011

It’s a Negotiation, Not a Surrender I All Procurement Wants for Christmas is a White Horse | Beware the Simple Fix | Will Guarantees Blunt the Buzz Saw? | Competing Against Low-Cost Competitors | Good Reading!

It’s a Negotiation, Not a Surrender

By Dr. Reed Holden

In the face of relentless calls for concessions by increasingly powerful companies—insert name of your least favorite multinational corporation here—sales leaders have responded by mindless discounting, hoping to make up any losses with longer-term contracts. High-powered procurement professionals who win the concessions have gained significant stature in their companies, based on their cost-cutting success during the recent Great Recession. Unfortunately, discounting is a fool’s response. Those who live and die by discounting don’t live very long. The name of the game today is maintaining margins.

Yes, the big guys seem to have all the advantages. They use their scale and marquee to squeeze the little guy. But sellers are not as powerless as it may appear. In fact, vendors have a number of tricks and tactics available to fight back, protect their margins, and keep the business. Negotiating in these customer situations is not surrender. Remember, the bigger they are, the bigger their appetite. They may be as desperate as you are.

Sales professionals labor under the assumption that all the power is on the other side. That’s because the inevitable response is price discounting. Discounting becomes an addiction that actually undermines the long-term health of the business. It decreases profits and erodes the quality of customer relationships. The sad fact is that this happens even in organizations that provide significant value to their customers. This value is overlooked, underestimated, or flat out ignored, when, in fact, it is the key to breaking free of the conventional wisdom of discounting.

To the extent sales professionals believe they must trade margins for revenues, they undermine their success and train their customers to expect a price concession each and every negotiation.

Consider the position of the Advantaged Player—that salesperson is at the negotiating table with a customer. There are probably other competitors, and the buyer spends a lot of time talking about how their prices are much lower than the Advantaged Player. In fact, there may be some yelling going on about how our Advantaged Player has to lower prices in order to close a deal. Does he have to? Nope—it’s all a poker game. In fact, the more yelling that occurs, the worse the hand—for the customer. The Advantaged Player has the winning hand. He doesn’t have to discount, he just has to play the game and close the deal.

Compare that to the position of the Rabbit—that is the salesperson who is added to the bid list to drive the price of the Advantaged Player down. The Rabbit has no chance of winning the business. They have no contacts with the real decision maker and no chance to sell value. The Rabbit has the losing hand and is better off just not playing the game, especially if the time needed to prepare a bid is more than two minutes. It’s just a flat waste of their time.

If you understand your position in the game, you can play the game better—walking away from the table if you have a losing hand but out-bluffing the customer if you have the winning hand. It’s not that hard, and it’s a heck of a lot more fun.

All Procurement Wants for Christmas is a White Horse

Commentary by Mark Burton

From: “Driving the Right Deal,” Dobetterdeals.com

We’ve been talking for the past few years about how far ahead of sales and pricing professionals customer procurement teams have become. We recently came across a procurement checklist on a web site dedicated to helping technology customers get better deals. I’ve highlighted and commented on a few of my favorites. Important safety notes: Do not read before, during, or after a meal. Do not read before going to sleep.

• At negotiation time, the vendor's sales representative has projected to his management that the deal with the customer has already been sold. Use this to your advantage, since the sales rep has placed the pressure on himself to close the deal. (Just as reps are taught to get customers emotionally invested in a deal, procurement knows that the rep is almost always more invested.)
• Vendor reps face many pressures to reach certain sales goals at various times, such as quarterly, annually, or when earnings are down. Be aware of these pressures. (End-of-quarter discounts, anyone?)
• Generally, it's to the customer's advantage when vendors bring in their top brass. They have more to give away than the sales reps do. (We call this The White Horse Syndrome!)
• Vendor shareholders and senior management are primarily interested in bottom-line profits and allocating risks to the customer, not interpersonal relationships. Don't rely on these relationships; vendors just use them to get what they really want. (All vendors are scum!)
• Vendors must be aware that negotiations will end only when the customer is fully satisfied and the agreement is fully documented. (A nice way of saying, “Keep nibbling because the vendor will go along with it.”)
• Ignore a vendor's claims, especially early in negotiations, of "That's the best deal we can give you."
• If you haven't heard a “no” from the vendor or haven't experienced a deadlock, impasse, or some sort of breakdown in negotiations because you asked for too much, you haven't gotten the best deal you can get.

Here’s the issue and the opportunity—good procurement professionals know how the sales process works. Most of their tactics simply exploit this by putting the sales rep under pressure and sitting back and watching them give in. They know the rep has made internal commitments to getting the deal and that their credibility is at stake if they don’t. They know that when a senior executive shows up that they have a saddle bag full of goodies on their white horse to give to a tough-negotiating customer.

Now notice what is not included in this list:

• An assessment of which vendor provides the best overall solution and greatest value—before price
• An assessment of how important the purchase is to the organization
• An assessment of the damage in credibility to the procurement professional if a preferred vendor really does walk away

It’s not that these assessments aren’t performed. It’s that they are never shared with vendors. Yet as sure the sun will rise tomorrow, they exist and are just as predictable as the shortcomings of your sales process. Only when organizations finally wake up to these and are to willing to exploit them in negotiations will we be able to start undoing some of the damage that procurement practices have had on pricing.

Beware the Simple Fix

Commentary by Ellen Quackenbush

From: “Pricing Pains? More CFOs Turn to Software for Better Profits” by Roy Harris, Computerworld.com, October 13, 2011

Pricing is a hot topic in the C-suite these days. Companies have exhausted most relatively easy cost-cutting opportunities in materials and labor and are now facing a stubbornly slow recovery in top-line demand. With the familiar paths to improved profits already traveled, more and more companies are turning to pricing—in specific, pricing software—as a road back to improved profitability.Love the direction, not so sure about the exact path.

True, pricing is the best profit lever that a company has. In Holden Advisors’ experience, a one percent increase in price can yield a minimum of a 20% improvement in profits. If pricing is that powerful, why not jump to the fastest route to that profit—installing pricing software? Simply stated, because you may be locking in your current business problems and barring the path to your real profit potential.

Before you automate, be sure that you have basic pieces in place to assure that the pricing analytics that a software package creates will enable continuous improvement in pricing. These core foundations are:

• Data Maturity—analytics are only as good as the data on which they are based. Deal-level transaction data should be collected at its source to assure consistency and accurately reflect similar deals. Cost-to-serve data should be based on incremental and avoidable costs, rather than averages costs, to reflect true customer profitability.
• Process Maturity—the pricing process should be in place before any software is implemented. Clear decision rules should be in place to enforce pricing policies and assure that similar deals are granted the same price—that is, the same input generates the same output. A central pricing group should work to create deal guidance to assure that salespeople have the flexibility to make profitable pricing decisions in the field.
• Readiness for Change—management across all key stakeholder groups should work to provide oversight of the pricing process and to assure that list prices and pricing policies are adjusted to meet changing business and competitive situations. That way, pricing software is more than a black box that generates “a price” and becomes a profitability decision-support tool.

Our advice to customers that do not have these basics in place?  You may generate short-term benefits by capturing the low-hanging fruit of unearned discounting, but you will miss the bigger prize of long-term, sustainable pricing improvement. Pricing software is a key ingredient to achieving this goal but will not make up for poor foundations in data, process and management support. This long-term potential is the real money left on the table by a hasty rush to automate pricing.

Will Guarantees Blunt the Buzz Saw?

Commentary by Dr. Reed Holden

From: “Keeps Cancer in Check or Your Money Back,” Bloomberg Businessweek, November 21, 2011

At least one pharmaceutical company has enough confidence in its drug to offer a guarantee. Reacting to a new law in Germany which gives insurance providers the ability to negotiate for lower drug prices (what took them so long?), Roche is offering a guarantee on its $6,000 per month cancer drug, Avastin.

This is a terrific response to the increasing downward pressure on drug prices and one that might actually work. Struggling to get listed on increasingly price sensitive health carrier drug formularies, pharmaceutical companies have had to rely on discounts for even tier one brand name drugs that offer lots of patient advantage. It’s a bit of a desperation move—you’re damned if you do with lower prices, and you’re damned if you don’t with lower sales. It has really been a no win situation for them.

This new tactic is creative and banks on the ability of the drug to dramatically shrink tumors within a relatively short period of time. One medical expert didn’t like the promotional aspects of the guarantee citing that what they really need is solid evidence. That’s not true. There is plenty of solid evidence that many drugs reduce medical costs and save lives. That hasn’t stopped the insurers from putting the pharmaceutical companies through the price buzz saw of procurement.

The guarantee is a way of making a promise of the results to physician, the insurer, and especially the patient. It’s a way of showcasing the value that Roche believes the drug has. It’s a way for them to put some money behind the promise of value, and, it’s a way to blunt the discounting demands of the insurer. If they want lower prices, no problem—no guarantee. This sets the table for a better poker game at least.

It remains to be seen if this relatively new tactic will work—it will take some chutzpah for Roche to stick to their guns and their strategy. We wish them well.

Competing Against Low-Cost Competitors

By Ashwin Somakumar

From: “Google and Facebook Fly Into Server World’s Bermuda Triangle,” wired.com

In many industries, established market leaders are being challenged by low-cost competitors—competitors that offer “good enough” products and services at very low prices. In this Bermuda Triangle article, the low-cost threat is coming from “original design manufacturers” based in developing Asian countries. The article talks about the growth of no-frills, low-cost servers from Taiwanese manufacturers, and the threat it poses to established American server makers, like HP, Dell, and IBM. With major Internet companies like Google, Facebook, and Amazon now apparently buying from these low-cost manufacturers, this clearly doesn’t bode well for the incumbents.

There are companies in many industries facing this dilemma now—should we respond to the threat of low-price competition, and how do we respond? More often than not, the market leaders will underestimate the magnitude of the risk from these lower-priced competitors and choose not to respond. For example, the world’s leading telecommunications companies were so focused on out doing each other that they failed to recognize the threat from a low-cost Chinese company Huawei, now one of the world’s largest suppliers of mobile telecommunications infrastructure equipment. These Taiwanese companies, with significant cost advantages, may have entered the market in an undeveloped or unimportant segment. In this case, they could be selling their servers into test environments for application development or for back-up and archiving. It’s only a matter of time before they start entering the prime segments of the market. Incumbents get caught in a ‘premium position trap’ that ultimately leads to their downfall.

So how should companies respond when faced with such a challenge? It’s very easy to fall into a trap of just lowering your prices to complete more aggressively. But that only reduces your profits and devalues your brand. Instead, companies should introduce a lower-priced flanking offering to combat low-cost competitors. It’s a tried and tested approach to protect the integrity of your high-value brand. Having a flanking brand enables you to meet different customer needs. It helps insulate your high value from the low-end products. If Google wants a server minus the fancy software, give them an option of buying a bare bones server without customization. Customers who are price conscious or can justify using cheaper products for their business will gravitate towards your cheaper brand, whereas customers who need the total solution—the server along with the custom software, technical support, extended warranty, etc.—will be much less likely to switch. The flanking offerings might even open up new market opportunities that didn’t previously exist.

While pursuing this dual offering strategy, American server makers can leverage their strength in understanding customer problems and proactively develop solutions for those problems. They should plan to continually introduce new and innovative products/services to make the low-cost competitor play continuous catch up.

Good Reading!

• How to Measure Anything: Finding the Value of "Intangibles" in Business by Douglas W. Hubbard, Second Edition, 2010 John Wiley & Sons, Hoboken, New Jersey. This book was quite technical and complete. It had a good discussion on measuring risk and uncertainty, the use of Monte Carlo simulations, sampling, and the use of regression analysis to create estimates. If you're into this type of thing, a worthwhile read.
• The Drunkard's Walk: How Randomness Rules Our Lives by Leonard Mlodinow, 2011, Pantheon Books, New York, NY. This is a book mostly about the history of chance, the people who started writing about it hundreds of years ago, and interesting stories and insights into the field. A good read but a few too many statistics and analytics for a casual read.
• That Used to be Us: How America Fell Behind in the World it Invented and How We Can Come Back by Thomas L. Friedman and Michael Mandelbaum, 2011, Farrar, Straus and Giroux, New York, New York. With an election year coming up shortly, this is terrific book to help us all understand the problems that we face as a country and the solutions. It serves as a primer for how we need to think about the work of our government and business leaders and our own actions to regain our former greatness. A terrific read.