Two Preferred Vendors

First, we learned that of the eight potential vendors, the disk drive company really preferred two vendors. One of the preferred vendors was the client we represented, and the other was its largest competitor. Second, we learned that the customer had critical delivery requirements to meet the expected demand for their new drives. These two facts were quite favorable for our client because it had an excellent history for meeting delivery requirements that were better than the competition. Now we could get to work devising a specific price strategy.

We calculated that the incremental value derived by the disk drive customer from choosing our client's semiconductors rather than the competitors came down to four dollars per unit. We had to make sure their pricing met the fairness test. There was a lot of discussion around what percentage of the incremental four dollars per unit of value our client could requisition and still be fair to the customer.

In the end, we advised our client to charge an extra 25%, or an additional one dollar per unit. We argued that the increase of one dollar was a fair exchange for the four dollars per unit of incremental value. We understood that the competitor would most likely charge at least one dollar less, and that the procurement person would use aggressive poker-playing tactics to get our client to lower their price.

The Negotiations Ensue

The first step in any negotiation is to know your opponent's position better than they do. Based on our insights, we predicted the moves the customer made. First, the customer's purchasing agent argued, threatened, and bluffed our client's selling team. Fortunately, we had prepared the team to defend themselves. The prescribed language: “We'll be pleased to meet the lower price, but at that price we cannot give you the delivery guarantees you expect.”

The customer's purchasing agent upped the game playing. He cancelled meetings at the last minute. He made our client's pricing team cool their heels. He telephoned our client's executives attempting to exploit weaknesses in the pricing strategy. Having been trained in a new level of selling backbone, our client's selling team anticipated all his moves and wouldn't budge. Eventually, the purchasing agent caved.

Like every good negotiation, it turned out to be a win-win. In subsequent years, the customer sold 13 million disk drives incorporating our client's semiconductors. The disk drive customer became our client's most profitable customer overnight. By going on a value hunt and with prepared negotiation plans, our client grabbed an additional $12.5 million off the table.

The Key Elements of Backbone

For Backbone to work, sellers need to ask two simple questions.

The first question uncovers the true buying behavior of the customer. Customers have different agendas for different vendors. Each agenda and subsequent buyer behavior requires a vendor to prepare different offerings or solutions, pricing, selling, and negotiating approaches. There are four types of buyers that represent observable behaviors around the world. Understanding those behaviors helps a seller craft a more efficient and profitable approach to the customer before, during, and after a negotiation. Let's introduce the four groups.

• Price Buyers. These customers buy exclusively on price. They don't care about value-added enhancements, nor do they care about fancy bells and whistles. They establish purchasing criteria for a wide range of possible vendors and make sure they qualify everyone to bid on the business. Price buyers are careful not to let themselves commit to any particular supplier and make sure they have no switching costs. You can tell a price buyer primarily because they are frequently switching vendors in pursuit of the lowest possible price. If you want to sell to a price buyer at a profit, you need to have the lowest possible cost.
• Value Buyers. Value buyers have recognized the flaws of purchasing based on price and have extremely sophisticated technical or business process people who regularly evaluate the value that alternative vendors offer. Their goal is to quantify that value and choose the best of the alternatives from a limited set of trusted vendors. Value buyers are fairly up-front about what their agenda is. It's important in approaching a value buyer that you first need to understand the value they are looking for, showing them along the way that you can be or already are a trustworthy vendor.
• Relationship Buyers. Relationship buyers rely on close relationships with trusted suppliers to meet their needs. As a general rule, relationship buyers already have relationships with a particular trusted vendor in each area. They will, on occasion, realize that the current vendor can no longer meet their needs. At that point, they will often move to value buying behavior to evaluate a small group of trusted vendors. If a seller is one of those trusted vendors, they need to stay ahead of the evolving needs of this particular customer, always looking for new ways to meet their needs. If you are on the outside, you need to have endless patience. Patience to show that you are trustworthy, in many cases without getting any business from the client. It can happen by meeting small customer needs to show that you can be a trusted vendor. The trick is to stay close to the customer so that when they have a need the current vendor can't meet, they will come to you.
• Poker Players. Poker players are value and relationship buyers who have learned that if they focus on price, they can often get vendors to discount high-value features and services. Poker players have learned that desperate suppliers will do just about anything to get their business. The key to identifying poker players is determining whether they are really value buyers or relationship buyers disguised as a price buyer.

The first modern book on value, Techniques of Value Analysis and Engineering, focused on how to get lower costs from suppliers. It was the first step in educating procurement people to become poker players. Written by Lawrence D. Miles, a former procurement professional for General Electric, the book argued and advocated that businesses engage professional training for procurement people to expertly negotiate lower prices. Since then, most countries have professional associations of procurement people that do extensive training on how to play poker with vendors.

Interestingly, many companies overestimate the ratio of price buyers to value and relationship buyers. On average, professional sellers estimate that 70% of their customers are price buyers. Our research determined that, in fact, only 30% of customers were price buyers. The difference of 40% is made up of the poker players. We believe that number is growing dramatically in a wide range of industries around the world.

Buyer Behaviors and Inflation

In inflationary markets, sellers are assigned to present price increases. This is an uncomfortable job in the best of times and more difficult when customers feel the weight of costs rising. How do you prepare your sales teams to deliver the price increase message and get it to stick? First, regardless of the buyer's behavior, prepare for customer objections. A whiteboard exercise with the commercial team will highlight most objections and allow them to thoughtfully prepare answers.

• For price buyers, give them the option to accept the increase. In the alternative, void the contract. If you have constrained capacity or supply chain interruptions, it is better that available products go to high-value customers first.
• Value buyers need choices. While discussing the increase on their current product, offer a lower value option. This will improve your overall customer relationship because they see you have their best interests at heart.
• Relationship buyers will best understand the need for the price increase. Importantly for this group, don't gouge them relative to other buyer types. This is a sure way to lose trust and long-term commitment.
• Poker players (value or relationship buyers in disguise) will push back the hardest on the increase. First, expose their true behavior. You might do this by offering to cancel the current contract. That will get a reaction. Then discuss an increase or a lower value option.

The most crucial element in implementing a price increase is that all customers take the increase. Otherwise, you later alienate the customers that took the increase, realizing that others did not. This creates more poker-playing customers.

Your Position at the Table

The second question uncovers what your true relationship with the decision maker is and how that positions you at the table. Think about whether you as the seller have a positive relationship with the decision maker. Indifference on the part of the customer means you lack a positive relationship. You must not allow yourself to be deceived on this point.

What's a good relationship? It starts with open and honest discussions with the decision-maker. It means they will honestly tell you where you stand and how you can help them better serve their customers. They will be forthcoming with criticism as well as praise. Both are gifts. Decision makers are budget owners, rarely procurement people. As a general rule, the only time procurement people are decision makers is when they are price buyers. All other times, they're just playing poker and they are experts at bluffing you.

Several years ago, we were working with a large paper company. We received a call from a senior sales executive who wanted our advice while preparing for a high-stakes negotiation. Their strategy was perfect for a relationship buyer. Unfortunately, we determined that the customer was truly a price buyer. After discussions, we predicted that her company had little chance of winning the business from this particular buyer using the indicated strategy. We suggested the executive change her strategy or use her time to focus on more promising customers. The executive angrily rejected our recommendation and plowed ahead with her team to prepare for the battle. Two weeks later they lost the deal.

How did we know the buyer in question was a price buyer and not a relationship buyer as the executive assumed? At one time, our client did enjoy a long-term relationship with the customer. But the customer had recently been acquired by a conglomerate that had a long history of price buying. Further, we learned that the buyer from the conglomerate had taken over the purchasing of the particular product offered and had invited a large number of other companies to submit bids along with our client's. This was clearly a price buying situation.

Backbone requires a clear understanding of the facts and preparation. To win in the game of customer negotiations, the salesperson and executives must have an unobstructed vision of what it is the customer genuinely wants, what they're willing to pay, and the ability to subsequently deliver. Understanding the customer's likely buying behavior is critical because it tells the seller, first, whether there is a chance of winning the business and, second, what needs to be done to make sure no money is left on the table. Your position at the table tells you whether you have a real chance of winning the business.

RFPs – Learning Not to Dance with the Devil

At this point, it's worthwhile to spend a few moments talking about Requests for Proposal (RFPs). An RFP or tender is often a signal that a customer is trying to do one of four things. First, they are using the tactic to drive down the price of the incumbent vendor. Second, they are on a fishing expedition to see how a wide range of vendors will respond and have no immediate need. Third, they are a value buyer putting a limited number of vendors through their paces or, fourth, they are a true price buyer. Knowing the correct reason for the RFP will help you decide whether you should even bid and, if you do, whether you have a chance of winning the bid and making a profit. If you don't know the reason, don't respond until you do know the reason.

Before we give you any prescription, please answer the following questions.

• What percentage of your RFPs do you win?
• How much time do your people spend on responding to each RFP?

With respect to the first question, we are constantly surprised that our clients do not have the data to answer this simple question. With respect to the second, if you are dedicating more than a few hours of staff time to the average RFP and your close rate is below 20%, you are probably wasting resources responding to RFPs.

It's a sad fact that dominant vendors to an account respond to customer RFPs too often. This is especially true when the RFP indicates a shift in buying responsibility from a technical person or a user to the purchasing agent. This is also the case when there is a third-party consultant managing the bid process. The worst thing that a dominant incumbent can do is to respond to the RFP. When they do, they are either going to have to drop their price significantly to win the business they already enjoy or they are looking at losing the bid to a low-value vendor. Selling with backbone is a much better way of dealing with this tactic than responding to RFPs. Let us tell you a story about a firm that didn't cut off a customer's attempt at running an RFP with a few simple words.

We encountered a situation with a financial services client that was the preferred vendor for a $10 million bank audit contract that had to be done quickly. The customer bank hired a large consulting firm to manage the negotiation, a clear indication that they were playing poker. We believed that the consulting firm would justify its fee by telling the bank that it would be successful in getting our client to reduce prices dramatically. Because we were prepared, our selling with backbone discipline devastated the consulting firm's strategy.

Our client's partner made her presentation to the bank, quickly closed up her computer, and started leaving the room. The poker playing consultant stopped her and said they might put the job out to bid. The partner then said, “We thought you might do that. If you do, our price will go up, and we won't be able to do the job in the time you need.” Then she quickly left the room. We had fun picturing the bank executives hammering the poker-playing consultant. Our client closed the deal at $10 million few days later.

The Importance of Trust

In dealing with both relationship and value buyers, trust is vital. Research we conducted found that there were two major drivers of price buying behavior. The first driver was the size of the company. Larger companies have the wherewithal to develop the internal expertise they need to create extensive specifications and evaluate alternative vendors based on their ability to meet those specifications. But even large firms rely on trusted vendors in areas of professional services and advanced technologies.

The second driver was the level of trust in both the selling company and the salesperson. That's important because if there isn't a plan to develop trust with customers, they are going to be either price buyers or poker players.

We recently had a conversation with the CEO of a large technology company. The CEO was building a home, and we were a reference for a builder he was considering using. The CEO said the main requirement was that the builder would be on time and come in on budget. The goals were reasonable. Then we told him about someone who had the same objectives. That person found a builder that delivered the construction on time and on budget. But in year one, the homeowner had to replace all the cabinets and the floors in the house. Why? Because most builders can give you a house on time and on budget if they cut corners. And they will have to cut corners because the nature of building a significant home is inherently unpredictable. Much more important than empty promises, we suggested, is trust.

This CEO accepted the wisdom of what we said. What he really wanted in a builder was someone trustworthy to deal with the unpredictable nature of building a home the CEO would be happy with. As much as the CEO traveled, he had to depend on the builder for making day-to-day decisions, some of which were bound to impact schedule and budget. We recounted our positive experience with this builder: how we did work without contracts, with flexible budgets, and all on a handshake. Maybe you think we are foolish. But we can tell you that when you trust someone with expertise and integrity, the work is usually better. Plus the experience is more enjoyable.

Many companies still prefer to deal with vendors they trust. They save a lot of worry and money overall and get high-quality results each and every time. We have a true trusting relationship with one of our largest clients. We work as if we are true employees, and they trust us to do the right thing. We can be open and honest with them and are willing to make deep commitments to their success. Believe us, it's a wonderful way to do business.

Backbone During Inflation

Selling Backbone is even more critical during inflationary times. It's perhaps more important now than ever before because procurement people are upping their game to secure lower prices. Fortunately, they are also admitting to a critical weakness that you need to know about so you can bluff them at the poker table. How do we know? Because we listen to procurement podcasts to find out what they're up to.

Procurement will resist your argument that inflation merits cost increases. Throughout this book, we've talked about the need to increase prices because your costs are going up. To do that, you've got to prepare your sales teams to execute those increase with Backbone. Why? Because the procurement people are already preparing their responses to your sales teams. They are loading up on responses such as, “No, we don't have the budget, you'll have to absorb the cost increase yourself.” Another common maneuver is stall techniques: Break down the cost to explain the increase.

The critical weakness for many customers is their need for reliability of supply. From commodities to high-value professional services around the world, procurement people understand that in these turbulent times, reliable supply is often a problem. Remember, their primary job is to ensure a supply of quality products and services to keep their own business humming without interruption. Interruption is extremely costly. You can use that certainty in your negotiating to blunt their poker-playing ways. How? Use reliability of supply as an expression of Give-Gets. If the buyer refuses to accept your price increase, respond that they can either accept the increase or you can no longer assure them of a reliable supply. This works every time.

Procurement people know that this is unchartered territory for vendors they face across the negotiating table. They know you don't know how to raise prices with a contract in place. They know you are focusing on maintaining the relationship and want to know how serious you are. Backbone is the “serious” they are looking for. We'll talk about this in Rule Ten (Deploy Three Practices to Increase Profits).

Vishal Kumar is president of AmeCast in New Delhi, India. The company specializes in replacement cast parts in stainless steel and high alloys for domestic industrial plants and the process industry. The executive teams have been using Backbone for over 10 years. Due to the latest downturn in demand and inflation, the company developed a price/value matrix for all of their products. To sort out the serious buyers, all inquiries get referred to the company's website, which has extensive information. The company expects serious buyers to qualify themselves before the company invests considerable effort. In addition, the company captures the value it offers by charging for all value-added services, such as visiting a customer's manufacturing facilities. To deal with price competition from lower quality Chinese competitors, AmeCast reliably applies Give-Gets. For example, Vishal was entertained by a large company that was attempting to make him pay a fee to submit a bid. The demand for the initial fee was 500 Indian Rupees (about $6.45). When Vishal told them he wouldn't pay anything, the company dropped the request to 100 Rupees (about $1.29). Desperate times bring out the worst in buyers, especially when they push to nickel and dime you, but having Backbone mitigates the pain and, at least in this case, gives our clients permission to have fun with unreasonable buyers.

Critical Elements of Selling Backbone

There are a few key elements for companies that want to see the benefits of increased revenue and profits from Selling with Backbone:

• Get senior executive support Senior executives need to learn, embrace, and support Backbone. Senior executives who understand the value of your firm will support efforts to charge fair and consistent prices in the marketplace.
• Target the right customers with the right deals. Not all customers can be good customers: good to deal with and growing profitably. Price buyers need to be profitable, or you need a path to profitability before you close the deal. Conversely, good poker playing identifies the value and relationship buyers in price buyer clothing and does the necessary things to keep your prices where they should be.
• Embrace value at your core as an individual and firm. This is not just paying lip service to the term “value.” We are talking about putting value at the core of a corporate culture and organizational belief system. We are fortunate to collaborate with a company president who embraces value. When this executive takes leadership of a division, it may take a year or more to sort through the opportunity, but he improves the division by believing in its value and expecting his people to do the same. In a recent training session, one sales rep suddenly realized that her largest customer was playing poker with her. With her new-found Selling Backbone, the sales rep went back to the negotiating table, demonstrated how her products specifically were saving that client millions of dollars. She and her team negotiated an additional $3 million profit on $80 million worth of business.

The bottom line of this discussion is that you can't implement fair pricing unless you have Selling Backbone. Irrespective of product, service, industry, and geographic location, pricing with confidence is all about Selling with Backbone.