Wise Negotiations
Sales perspective:
Today’s economy makes deals harder to close and margins tighter. Buyers are tough today. It is never easy to make a sale, but now it is harder than any time in recent years. Now you really have to negotiate.
Buyer’s perspective:
Procurement and supply chain managers are under tremendous demands to reduce costs. A recent study by Purchasing Magazine indicates purchasing professionals today are more focused on cost-reduction strategies than on other issues such as supplier capacity, finances or consolidation of suppliers.
Results show 48% of buyers polled said negotiating lower prices for products and services with their suppliers is their biggest priority right now. Other supplier-facing priorities ranked in order of importance included supplier consolidations (15%), ensuring the financial health of suppliers (14%), getting suppliers more involved with product development (12%) and, lastly, ensuring suppliers have the capacity to ramp up production when the economy recovers (11%).
Cost Savings Example:
Consider this example which illustrates the true business impact of negotiating better pricing from suppliers.
In 2008 ABC Inc. sold $987.4 Million and made a net profit of $81.4 Million, That’s about 8.2% net margin. This means, if an ABC Buyer can save $100,000 by being a better negotiator, this contributes just as much profit as if ABC could increase their total sales revenue by $1,219,512. And in today’s markets most companies are finding it rather difficult to increase sales.
So for ABC Inc. $100,000 in cost savings has the same impact as a $1,219,512 increase in sales.
Negotiating the Deal:
At the same time more organizations are pushing buyers to reduced costs, other organizations are pushing salespeople to increase sales—at higher margins. All this makes for some really tough negotiating.
So, what should salespeople do when negotiating prices with buyers that are on a price cutting mission?
Buyer’s must remain aware, and sometimes need to be reminded, that the cheapest per unit cost can often end up being the most expensive ‘total cost’ decision.
Switch from ‘Price’ to ‘Total-Cost’
Sellers must get buyers engaged in a ‘total-cost’ analysis. And it is in the buyer’s own best interest to do exactly that. This is really the only way a buyer is going to be able to discover, document, and get credit for ‘real cost savings.’ The blending of a buyer’s expertise on what they need, with a seller’s expertise on what is possible, provides a route to true cost savings. Best of all, during this discovery and analysis process, relationships are built which lays the groundwork for future business.
Satisfaction
The outcome of your negotiations must be a mutually agreed upon result that creates a Both-Win atmosphere rather than a one-win atmosphere. Satisfaction of both parties is key, and determines future business opportunities between the parties.
Today’s economy makes deals harder to close and margins tighter. Buyers are tough today. It is never easy to make a sale, but now it is harder than any time in recent years. Now you really have to negotiate.
Buyer’s perspective:
Procurement and supply chain managers are under tremendous demands to reduce costs. A recent study by Purchasing Magazine indicates purchasing professionals today are more focused on cost-reduction strategies than on other issues such as supplier capacity, finances or consolidation of suppliers.
Results show 48% of buyers polled said negotiating lower prices for products and services with their suppliers is their biggest priority right now. Other supplier-facing priorities ranked in order of importance included supplier consolidations (15%), ensuring the financial health of suppliers (14%), getting suppliers more involved with product development (12%) and, lastly, ensuring suppliers have the capacity to ramp up production when the economy recovers (11%).
Cost Savings Example:
Consider this example which illustrates the true business impact of negotiating better pricing from suppliers.
In 2008 ABC Inc. sold $987.4 Million and made a net profit of $81.4 Million, That’s about 8.2% net margin. This means, if an ABC Buyer can save $100,000 by being a better negotiator, this contributes just as much profit as if ABC could increase their total sales revenue by $1,219,512. And in today’s markets most companies are finding it rather difficult to increase sales.
So for ABC Inc. $100,000 in cost savings has the same impact as a $1,219,512 increase in sales.
Negotiating the Deal:
At the same time more organizations are pushing buyers to reduced costs, other organizations are pushing salespeople to increase sales—at higher margins. All this makes for some really tough negotiating.
So, what should salespeople do when negotiating prices with buyers that are on a price cutting mission?
Buyer’s must remain aware, and sometimes need to be reminded, that the cheapest per unit cost can often end up being the most expensive ‘total cost’ decision.
Switch from ‘Price’ to ‘Total-Cost’
Sellers must get buyers engaged in a ‘total-cost’ analysis. And it is in the buyer’s own best interest to do exactly that. This is really the only way a buyer is going to be able to discover, document, and get credit for ‘real cost savings.’ The blending of a buyer’s expertise on what they need, with a seller’s expertise on what is possible, provides a route to true cost savings. Best of all, during this discovery and analysis process, relationships are built which lays the groundwork for future business.
Satisfaction
The outcome of your negotiations must be a mutually agreed upon result that creates a Both-Win atmosphere rather than a one-win atmosphere. Satisfaction of both parties is key, and determines future business opportunities between the parties.
Labels: Improving Business Results
posted by Karrass at
5:02 PM
3 Comments:
Although your statement, to remind buyers of "cheapest is not always the best deal" is correct, I have noticed that in large organizations, buyers have clear cost reduction targets which they are following - without considering the risks on new supplier development, weak supplier financial situations, etc.
Why? Because they are not made responsible for any additional investments / costs related to bringing suppliers up to stream, additional workloads in engineering / quality / logistics because the supplied component is not according the expectation. "Low cost" from a "low cost country" is not always the best solution, indeed.
How to overcome such a situation, when you have to deal with such an organisation?
You need to be aware about the customer’s organisational structure and the function’s responsibilities and internal targets. Know your customer!
Try to locate the stakeholders within the customer (or your own organisation) that will be affected by a purchaser´s decision. Try to influence the decision. Do you have examples of what-went-wrong in the past on similar decisions? Maybe you still suffer of some of these bright cost-saving ideas. Try to build a lobby to find the best, real cost-saving solution.
Only looking into a short-term cost-saving & supplier squeezing may sound a good option, especially in a crisis; but be aware you may leave a path of destruction in the supplier portfolio behind you.
E
By
Anonymous, At
October 16, 2009 11:25 AM
Please explain in more detail the following – “Buyers must remain aware, and sometimes need to be reminded, that the cheapest per unit cost can often end up being the most expensive 'total cost' decision.” In your example there is not any reference to the cost per unit.
Thank you
By
Anonymous, At
October 27, 2009 11:40 AM
What we are referring to is when buyers put pressure on salespeople to give them the lowest cost per unit (i.e. per pound, per ton, per case, per hour, per load, per chip, per circuit, etc.) which makes it a commodity purchase decision.
Buyers have to be reminded that there is more to the price of something than the ‘per unit cost.’ That invokes looking at total cost.
What is the total cost to the buyer for product A (the lowest per unit cost) vs. the total cost to the buyer for product B (mid-range per unit cost), vs. the cost to the buyer for product C (highest price per unit cost)?
During the total cost analysis, and it is here where the salesperson needs to assist, other factors are identified which vary from one supplier to another (quality, response time, capacity, delivery schedules, problem solving capabilities, engineering capabilities, willingness to license patents, willingness to provide additional services, etc.) and values are assigned to each of these items.
These ‘value added’ elements differ between suppliers, and when considered, the lowest ‘Total Cost’ decision may be different than the ‘lowest cost per unit’ decision.
Hope this helps.
By
Karrass, At
October 27, 2009 11:42 AM
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