The Dangerous Games People Play: Price Negotiations

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Price is one of the most deadly weapons in the marketing mix.

One of  the “4 P’s” of marketing, and one that creates some of  the most pressure packed situations in business.

  • It determines 50% of a company’s profit margin.

  • Depending on your market share and/or industry, it is also the most controllable decision someone can make to influence their outcome of profit/loss.

  • It is the most easily compared element of the marketing mix against a competitor.  Evaluating $499 vs. $549 is easier than comparing product reviews, technical features or “quality” (perceived or real)

  • Could be the most “emotional” element in business.

Why?

Let’s say you are quoting on a business, and it’s somewhat of a “bid” process, meaning you are quoting against different competitors selling products that have SOME differentiation, but generally viewed as a commodity.  So Price is a MAJOR factor, but like all competitive situations, everything influences the outcome:

  • Quality and service track record

  • Terms, flexibility

  • Relationship:  How will your bid affect the relationship?  Does that matter?

  • Risk of loss:  If you lose, how does your business look?  Better or worse?

All situations have a different ranking.  If I were bidding, here’s what I’d be looking at:

*  How many different factors influence a buying decision?
*  Rank them from high to low.
*  Know where you score at all times with your customer.  How?  ASK THEM!

Also?Know the buying style of your customer.  Are they a “wheel and deal” buyer, expecting to go back and forth multiple times in a “lets make a deal!” fashion?  Or are they more of a straight shooter, and want your price with thoughtful consideration the first time, not when real risk presents itself?  Understanding your customer’s style and THEIR preferance to a pricing discussion is critical.

    • Pick the wrong one and you could be in trouble.  If you plan on starting high and  then caving with a threat, your credibility is at risk.  Start at your best and the buyer loves to wheel and deal, you may come off as inflexible as you hold the line.

    • If these were easy calls, you’d bat 1000, but they aren’t, so you won’t.  My approach is always to do as much homework up front and get close to the real deal the first time.

  • What role does history play in the bid?  If you are a current supplier, have you just recently raised your customer’s price and they did a bit of kicking and screaming, does that matter in the future bid?  Have you done a great job supplying the customer for years?  That should matter too!  If you are trying to win new business and have little or no track record, can you win the deal without a BETTER price?

Pricing  is very much influenced by supply and demand.  If you are in a fixed capacity world and you are highly confident you can “sell all you can make,” you should have more pricing courage, not less.  If the reverse is true, that should in part influence your approach.

One of the fascinating schools of thoughts comes from how you were raised in business.  I’ve seen 2 key schools of thought:

  1. VOLUME cures all ills.  Don’t risk the top-line.  Be aggressive, don’t lose volume.

  2. Protect the margin RATE.  If you need to make X% margin, make X% in nearly all conditions.  Failure to protect the rate is a no-no.

Every seller and every customer will have a bias.  Sometimes, there could be different biases among people at the same organization, making it even MORE complicated.

If you are running a business, there is no right or wrong “bias” as both can work.  However, there are lessons to be learned from the worlds largest retailers.  Why?  Retail success is measured by pennies of net profit (not quarters) for every $1 of revenue.  RARELY can you call on a retailer and not hear what their margin requirements are.  Their business is run on a formula, and they have honed what that looks like over time and rarely deviate.  Successful salespeople know their customer’s formula cold, and they work WITH IT, they don’t fight it.

As a salesperson, knowing your customer’s “success formula” is like breathing, a sub-conscious, critical activity to survive.  You’d be surprised how many people are short winded.  Therein lies your opportunity.

What are your pricing lessons you’ve learned over time?  Would love to hear them, drop a comment below.

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