How to Price Right the First Time—and Deliver Value to Customers
Particularly in today’s business climate, companies are continually evaluating all avenues to lower their costs. This has led to an onslaught of corporate sourcing activity to take all new contracts to request for proposal (RFP). This has also been extended to renewals of existing contracts, even with vendors with good relationships and performance. Master service agreement renewals are being leveraged and threatened without the vendor providing better terms and/or pricing. Sourcing and purchasing functions are being tasked and evaluated on their ability to negotiate lower pricing from initial proposals as well as year-over-year savings. The motto “more for less” has become the new standard.
Though it might seem that customers are only focused on cost, in all sales situations customers are looking for good pricing (not always the lowest), good terms, and a productive working partnership in exchange for the current scope of business and a potential to expand that relationship. Below are strategies to use when making initial proposals to customers to ensure you can get contracts with the margins you require, and that they get the pricing and value they require.
NOT ALL BUSINESS IS GOOD BUSINESS
We all want business, but you should avoid new business requests under these circumstances:
1. The amount of work to respond is not worth the business offered. Some RFPs require significant detail and custom work where the effort is not worth the reward.
2. The ability to do discovery work and meet with end users/decision makers is denied. “We just need your response” is not a partnership valuing a customer-focused proposal showcasing your expertise to help.
3. If it simply doesn’t feel right. You need to rely on your gut. Are they really looking to change vendors, or is this ammo to negotiate with a current vendor? Are they inflexible in answering questions or providing requested resources for proposal? If things seem amiss, devote your resources to companies where they don’t.
SET EXPECTATIONS—STATE COMPETITIVENESS WITH “VALUE” PRICING
When I sold multimillion-dollar outsourcing deals, an integral part of my messaging was that we were going to be “price-competitive,” but that we provided differentiated value to justify the price difference. I did that for two reasons:
1. We were usually going to be the highest-priced competitor. I wanted to prepare customers to make a decision based on factors other than lowest cost, especially if they could be persuaded they’d get a better “value” for their money.
2. It pinned the argument “We’re not going to be the lowest price but we will provide the best value,” so we could use it later when they pushed for better pricing. It also focused both our messaging and the customer on how we can provide better value—a task we would have had to undergo regardless. It just allowed us to continue to beat that drum of “value.”
Value or not, you still have to be competitive. What price premium you can garner depends on the value you can demonstrate. I demonstrated value selling outsourcing by detailing the quality and innovation of our products, the efficiency and continual improvements of our delivery processes, the expertise of our certified professional services organization, and our proven success with client case studies and references. I often use business cases to provide data and end user feedback that show cost reductions and efficiencies, ones that will justify our price and demonstrate our value.
PRICE IT RIGHT THE FIRST TIME AND IT RARELY INCREASES
Most customers’ expectations are that new technology and long-term services continue to drive efficiencies and hence lower prices. This expectation, along with the fact that highly skilled labor costs and the general cost of living continues to rise, underscores the fact that pricing correctly the first time is imperative to contract a profitable relationship. Below are strategies to consider when providing initial pricing on a proposal:
• Avoid pricing products as “loss leaders,” as it sets expectations and precedents that you can sometimes not change. If you want to introduce a product at a reduced cost, price it as a promotional offer with a limited time frame and/or quantity that is being extended based on a larger, more profitable commitment. Provide after-promotion pricing to avoid misunderstandings.
• Determine your standard and quantity margin expectations for each product/service/category—and don’t take deals below those thresholds. Reasons to do so will always be given, but you have to fight to keep your margin or every reason becomes a good reason to discount!
• Once standard and quantity margins are established, price the proposal 10 percent to 20 percent higher (based on market, competition, differentiators, etc.) to provide room for customers to negotiate. It is imperative to give customers an opportunity for a financial win that does not impact your expected margins. I allow for two rounds of negotiation after the initial proposal (if requested), with each consecutive round being a smaller discount than the previous round. The second round of negotiation is my BAFO (“best and final offer”) and should be explained prior to presenting to set expectations.
• Higher-value products/services/expertise should be priced at a better margin. Do not give away your best stuff for cheap—Nike and Mercedes don’t. Sell the value.
• Use actual financials from closed deals to adjust your margin expectations and pricing methodology. It is the ultimate market research.
Pricing opportunities correctly the first time is one of the key drivers of long-term profitability. Take extra care and diligence in developing your pricing strategy to reap the financial rewards. In the November issue, we’ll look at how to use a request by the sourcing function for a current contract “price reduction” to expand your business and relationship with the customer.
Paul Harney (email@example.com) is director of sales and marketing for I.T. Solutions, a professional services firm delivering strategy, transformation, and technology solutions. Its core consultants are IT practitioners with experience in the corporate and consulting worlds strategizing and implementing solutions from vendors such as Oracle, Microsoft, Salesforce, and ServiceNow.