I truly sympathize with sales people who are dealing with commodity managers in large corporate purchasing organizations. Those procurement specialists can be brutal in negotiation. More and more they are driven by corporate edicts to “source overseas” or “reduce commodity purchase costs by 3% per year” or to “reduce the number of suppliers by 20%”.
The truth is, classifying what they do as “Negotiation” is not fair to Merriam-Webster’s definition of the word – or to anyone for that matter.
Can it get any tougher for manufacturers? The Rock
These days, sales people and their parent manufacturing companies commonly find themselves confronting a series of “non-negotiable” buyer requirements that would be laughable, if they weren’t so real and becoming more common:
– 90 day payment terms
– Guaranteed cost-downs
– The lowest cost – period!
– The highest possible on-time delivery
– Impeccable quality
– Unlimited time frame on returns
– “No-questions asked” returns
– No-charge, collaborative up-front engineering and/or marketing cost sharing
– Transparent margin calculations
– And the requirement to keep a buffer inventory of finished parts in the factory – owned, of course, by the supplier
The not-too-thinly veiled threat hidden among those requirements is, “If you can’t meet these terms, we can always find someone else to supply that part/service in Mexico, Asia, Brazil, India” or even, “We’ll build those parts here – ourselves, inside”.
We talked about the Rock above. Here’s the Hard Place.
In the banker’s office the CEO and CFO of the small manufacturing firm are hearing:
– Your cash flow is slowing
– Your margins are slipping
– Your credit line needs to be reduced and renegotiated
– We need to see your financials, monthly
– We need to tighten up our loan portfolio because of the lending debacle of 2008
– and… “No, you can’t have any more leeway”.
So, between the banks pushing for higher prices and margins on your products to improve cash flow (or you lose your financing), and your big customers pushing for lower and lower prices, what’s a small manufacturing firm to do? And, how does a sales person make a living if he isn’t price competitive. Isn’t some margin, albeit low margin, better than losing a customer?
What Price Competition Really Means
Price-driven competition means that one or more of the following statements are true:
- The buyers in your target market perceive no meaningful performance or value differences between products from different suppliers – including yours
- Your product offering actually has no real and meaningful differentiation compared to your competition for those customers in that target market segment
- You, as a sales person, or your marketing team, are doing a very poor job of communicating your meaningful, market-specific differentiation to customers in that market
- You are unable to economically quantify the value your product can deliver to customers in that market
- You are aimed at the wrong market and customers – a market for which your differentiation does not actually deliver meaningful, economic, emotional or physical value
We have seen all of these situations in our client engagements – typically disguised and drowned out by the sales person’s pleading and cries to “drop the price”.
So What Can Be Done About This Kind of Situation?
The simple, yet most effective answer is: Decide which of the five statements above are true – then set about fixing them.
It is actually easier than you might imagine.
A Case in Point 1: Wrong Market Targeting
A client of ours had a new product that wasn’t selling well. It was price disadvantaged by a factor of 3 over competitive offerings in the general market!! In spite of this, the new business development team was hustling to set up general distributors across the country. They were counting on a major price reduction they were politicking for with corporate to spur sales – when in fact corporate was quietly considering shutting the product line down.
We were asked to determine whether the product line was worth saving.
What little sales there were, were focused in two very narrow markets. Simply by asking customers that bought the few units that were sold in each of these markets why they bought this “over-priced” alternative, a set of inherent, here-to-fore un-promoted competitive advantages were revealed.
Then simply by pivoting the sales team to focus on the market in which the most compelling benefits were revealed the following results were realized:
– Not only did the price not have to be reduced, the market’s desire for added features quickly brought the average selling price of the top model to 4X the original price!
– The single largest order for this product had been $20,000 – now with focus and a re-promoted and re-emphasized set of market-specific benefits the largest order from a customer exceeded $1,000,000
– The number of new customers buying this product quickly rose from 2 to over 150
– Price reductions were no longer discussed
– The effort to saturate the market with distribution outlets was no longer considered necessary and saved a ton of money
Case in Point 2: Poor Economic Benefits Communication
In another instance a client was puzzled by the slowness with which their new product, designed specifically to help customers save substantial amounts of money, was not selling better. The root cause was discovered to be the distributor sales manager who simply “.. did not believe the economic argument” and refused to promote it – in spite of the customer testimonials to the effect of the savings realized.
A rapid individual re-education was required, followed by a re-training of the distribution sales force, and the product’s sales turned up shortly afterwards.
Case in Point 3: The CEO Gap
I once asked a group of 12 B2B CEOs to take out a blank sheet of paper and write down what they perceived as their best product offering, the product that they thought customers should appreciate the most. I also asked them to identify an ideal customer for that product.
I then asked them to identify the factors and calculate what economic benefit that ideal customer was likely to receive from that product. They stumbled. None of them could do it in the 15 minutes allotted.
If they can’t do it – can their sales people?
The Point:
Price-driven markets and situations are often a symptom of; a) misdirected market targeting or b) a lack of understanding of, and poor ability to communicate, market-specific economic, emotional or physical benefits of your product offerings to potential customers.
Customers buy for their own reasons, not yours. No matter what you have convinced yourselves about the value customers should see, they saw what they were looking for when they decided to buy. Sometimes it’s not what you want them to see, but if it worked it is delivering real value.
So, if your sales people are screaming for price reductions and you have customers buying when you are not the cheapest price – those customers are seeing something you are not. You need to find out what that is and why. And if they are not buying when the economic case is real, independent of the price, your communication is broken somewhere along the line.
Oh yeah, one final point. If price was truly the ultimate deciding point for decisions, we’d all be driving Versas. If it helps, here’s a link to Car and Drivers article on the 10 Cheapest Cars
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If you’d like to learn more about dealing with price-based competition call Jerry Vieira, CMC at 503.318.2696 or email to jgv@qmpassocites.com. The QMP Website is at www.TheQMPGroup.com and more insights can be found at The QMP Insights Blog