If price were the deciding factor in procurement, sales would be simpler and quicker. But it’s more complex than that.
Today, over 60 years after his crowning achievement Chuck Yeager remains one of the world’s most revered pilots.
President Gerald Ford awarded him the Congressional Gold Medal, President Ronald Reagan honored him with the Presidential Medal of Freedom – and these outstanding awards were but the cherries on a cake that included countless military and civilian honors.
In 1947, Chuck was the first person to break the sound barrier. Some thought a plane breaking the sound barrier would disintegrate, while others believed it would disappear into another dimension. So, when asked what his biggest fear was before the flight, what did this undoubtedly courageous man reply?
His answer was immediate and emphatic. “My biggest fear is that any part of my plane was built by the lowest bidder!”
Now, imagine you are the procurement manager on Chuck Yeager’s mission. On the one hand, you are responsible for making sure that the USAF gets optimum value on behalf of the American taxpayer, on the other hand the purchasing decisions you make have potential life-or-death impact and the potential to jeopardize entire projects and missions.
Would you want to buy the cheapest?
OK, not every procurement manager presides over life-or-death, multi-million dollar projects. But, when you consider the negative effect a wrong decision may have on any project, the same logic applies. If you save €1,000 buying 500 sub-standard door handles for an office block, whose reputation is called into question? And who pays for the replacements after they fall off?
So, if you’re the one selling the better door handles ask yourself, just how important is price in closing a deal? There’s a strong tendency – an obsession, almost – among sales people, that price is the only thing that interests procurement people. As if all other questions were merely motions to be gone through before discussing the great deciding factor – money.
Some years ago I was training the field sales force of a Fortune 100 technology company. Several months into the program one of the reps asked me if I had any advice on how to prepare for a negotiation with a professional purchasing manager. I asked if he had ever spoken to his employer’s own procurement department. The thought had never crossed his mind, so I arranged for three senior purchasing managers to spend the day with the sales team, performing role-plays and answering their specific questions.
One exercise I did involved presenting both the sales team and the purchasing managers with a piece of paper, on which I had listed the following:
* Reputation of vendor.
* Contract terms and conditions.
* Quality of vendor’s product.
* Buying history with vendor.
* Financial strength of vendor.
* Price of vendor offer.
* Vendors’ knowledge of the Customer’s business.
* Vendors’ knowledge of customer’s industry sector.
I asked both groups to list what they believed were the most important factors when selecting a vendor and where do you think the sales reps put price? You guessed it. Every one of them had listed price as either number one or two.
And, where do you think the purchasing managers had placed price in their hierarchy of importance? The highest it reached on the list was number four. One manager even placed it at number seven!
When I presented these findings to the participants, the sales reps were gob-smacked. One of the reps, still somewhat incredulous, looked at the procurement people and blurted out:
“How come price is so far down your list and it’s at the top of the list of what we believe is important?”
“Because that’s what we want you salespeople to believe.” Came the immediate response.
The important word that I want to draw your attention to here is belief. It’s belief that is at the heart of such vendor bashing. If you believe that price is of utmost consideration for the buyer, your thoughts turn to supporting that belief. Thoughts such as:
* What price do I need to be at?
* What price can I get away with?
* How much discount should I give?
* How much is my competitor asking for?
* What discount level can I go to?
Our own thought process is supported and nurtured with sweet nothings emanating from the customer, sweet nothings like: “You’re competition is cheaper”, “You’re not even close” or “You’re crazy if you think we’d pay that much”. This conversation is only going in one direction, down Discount Boulevard. That’s because our actions tend to be consistent with our thoughts. Our minds strive to bring our thoughts and our actions together and we experience mental discomfort or dissonance when they aren’t working together. Think of all the times you’ve banged your thumb with a hammer when you let your mind wander. Or notice how quickly your hands subconsciously turn the steering wheel in the direction you’re looking. What a powerful metaphor ‘Keep your eyes on the road’ is.
Lowering price in negotiations is a self-fulfilling prophesy. If your goods fit the bill already and you lower your price, of course you’re going to get the contract. This in turn confirms your belief that price was the decider rather than quality.
The only alternative belief you can hold is that you were the fool who left money on the table, who gave away the goods. But that conclusion is too much for most people’s egos to bear, so we stick with the mistaken belief that price is all.
Once you believe price is the reason you lost a sale, money weaves its way into every corner of the deal, leading you down a completely false trail:
“We didn’t discount enough.”
“We weren’t lowest price.”
“We lost it on price.”
“The customer must have lied to us.”
“The customer’s probably taking back-handers.”
If selling only concerned money, negotiation would be much simpler and much quicker. We must give sales and procurement credit for being more complex and sophisticated than mere haggling. The truth is, as often as not, that we lose tenders because we are outsold by our competitors. As a result, our selling ability needs to be increased more than our prices need to be decreased. But the truth is often the first casualty of failure and we end up scapegoating any other factor in the equation other than ourselves.
So if we accept for the moment that price is rarely the ultimate decider in winning a sale, let’s look at why a buyer might be willing to pay more….
Joe Auer is a recognized international leader in high tech procurement. In a recent article he wrote, ”The supplier who quotes the highest initial price may be the only one who fully understands your requirements. Often, a product with a higher initial price has a lower total life-cycle cost than others because of higher reliability, residual value or other downstream factors. The supplier that quotes the lowest price may be lowballing.”
“Getting the best price isn’t everything. Getting full value for what you pay for means getting a product or service that performs as promised”
In another related article Mr. Auer advises buyers never to tell a vendor:
* How much you’re willing to spend or what your budget is.
* They are a strategic partner.
* You have a deadline for the project.
* You love its product.
* Your profit margins.
* They are the only vendor being considered, even if they are.
* You need its product.
* The bids you received from other vendors.
* That you prefer their product over competitors’ products.
So why does the buyer feel the need to withhold information? Are they paranoid? Are they trying to control what you believe? Or do you still believe it’s all about the price? Just think about how you act when you’re on the forecourt negotiating for a new car. What’s going through your mind?
* “What if the salesman knew the cost and impact of not having a car now, on my job and my family?”
* “What if he knew we were due to go on a 3 week road trip in the morning and our other car won’t fit us all?”
* “What if he knew the finance was settled plus the color and model are just what we were looking for?”
* “What if he knew how much we’ll have to forfeit if the trip has to be cancelled?”
* “What if he knew the bad experiences I’ve had with the other 2 dealerships in town?”
* “What if he knew this make and model is the only one on the market and in our price range that has a sun roof, manual gear, tinted windows and seven seats – which are all essential?”
* “What if he knew we’d be prepared to go another €1,500?”
* “What if he knew he’s the only guy whose warranty is worth the paper it’s printed on? ”
You wouldn’t give a person you’re buying from that kind of leverage, whether it’s a computer, a car or a house you’re buying. So why should a procurement manager give you that leverage? And, if he did, would you be in such a hurry to the bottom of the price pit?
The fact is that, because you don’t have that inside knowledge, price becomes the only ballast you possess to rebalance the price/value equation.
So the question is not: “How do I protect my price and profit margin”, what we need to be asking is “How do I gain more leverage?”
Leverage is the creation of a real or perceived advantage to gain additional benefit or reward. So how do you get it working for you?
Start examining every interaction you have with your prospects, customers and clients, to find out:
What deadline pressure(s) are they facing?
What are they already committed to?
What is the cost impact if they doing nothing
What kind of relationship do they have with your competitors
What is your unique selling proposition?
How does the total cost of your solution stack up against your competition?
How financially stable are your competitors?
There are plenty of other things you can find out, you know your industry and your market best, so it’s worth brainstorming and looking for a chink in the armor. Ask yourself “What does my prospect really care about?” and “How will my competitor respond?”.
Ask your prospect straight and direct questions, like: “Mr Prospect, my product is never cheapest so I need to ask you – what do you need to get from me to feel it is is worth paying the extra?”
Every buying circumstance is different, bringing with it different concerns, different questions and different imperatives.
Think about a commodity product like petrol. You buy it regularly, it’s the same wherever you buy it but its price varies. Do you always buy the cheapest? Not if the needle is at empty and the red light is flashing.
Are you on the cheapest telephone tariff? Does your credit card offer the best rate on the market? Is your gym the cheapest? Examine all of the purchase decisions you make using your own hard-earned money and you’ll see that purchasing decisions are rarely made purely on money. The moral of the story is, therefore, there will always be something your prospect is willing to pay a little extra for. Your job is to find out what that ‘something’ is, and then give it to him. In the case of Chuck Yeager, my guess that ‘something’ would have been reassurance and the world is a richer place thanks to the procurement team working on the Bell X-1 aircraft back in 1947.