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How to Win Price Increase Negotiations with a HUGE Customer: Case Study

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High-volume, high-visibility customers know they have negotiation power. That shouldn’t stop you from initiating price increases with them when they are warranted. Suppliers tend to back down under the pressure of negotiating with their biggest customers, and who can blame them? Rocking the boat on price issues sometimes puts your company at risk of losing the business.

But take heart: It is absolutely possible to raise prices, no matter how large your customer. This case study will show you how one specialty tool manufacturer’s strategy and tenacity earned them the price increase they truly deserved.


BACKGROUND

A manufacturer of specialty tools, 427 TOOL (alias), is about to initiate a price increase selectively applied across their business. Many accounts will see increases; the amounts will vary depending on the various levels of price sensitivity among items, customers and markets.

The customer, BIGWERKS (alias), is 427 TOOL’s third-largest customer, accounting for well over $2 million in sales. 427 TOOL has been serving BIGWERKS for over 15 years. The volumes are steady, but margins are diminishing. The last price increase accepted by BIGWERKS was in 2007. Since that time, 427 TOOL has attempted to execute price increases on two separate occasions with no success. BIGWERKS made the process grueling by intentionally prolonging any price increase discussions until 427 TOOL finally gave up.

Compounding matters is that the purchasing personnel within BIGWERKS seem to be constantly changing. Interruptions in relationships between sales representatives and buyers prevent any continuity in discussions, which has made it difficult to achieve price negotiation goals over extended periods of time. At this time, prices have remained unchanged for seven years and have now fallen below market pricing. Obviously, this has negatively impacted margins at this account for 427 TOOL. The 427 TOOL sales representative, Roger, is preparing for a long and drawn-out negotiation process.

THE PROCESS BEGINS

September 2013

Roger has scheduled a meeting with the buyer at BIGWERKS to present the price increase. The average increase amount is 3.5%. However, increases are applied selectively to individual items, and not all items will see an increase. Additionally, Roger has prepared a summary of rebates, trade show participations and other supporting services that 427 TOOL has delivered over the past several years to demonstrate the added value the company has provided to this important customer.

BIGWERKS buyer, Justin, listens attentively at first but quickly starts pushing back, challenging the rationale behind the increase. Additionally, he begins to paint a picture of growing opportunities for 427 TOOL in the future. Suggesting that larger opportunities lie ahead for the supplier is a common tactic used by buyers to move the discussion off of the increase. Many sales representatives react to this discussion; Roger does not. He knows the discussion is intended to divert attention away from the increase. He is committed to getting the increase and stays focused.

October 2013

BIGWERKS looks to solidify their position with 427 TOOL by offering a long-term supplier agreement. The agreement includes descriptions of promotions, rebates, trade show participation, warranty allowances and the like. There is no mention of the price increase in the agreement. 427 TOOL pushes back on signing the agreement, and BIGWERKS says that the agreement is not related to the pricing discussions. 427 TOOL signs the agreement but continues to push discussions on the price increase. Looking back, 427 TOOL admits they should have delayed the agreement until the price discussions were resolved. This minor setback, however, did not negatively affect the final outcome.

December 2013

Roger schedules another visit to discuss the price increase with BIGWERKS. At this time, the buyer asks for more supporting information to justify the increase. While they will provide information supporting cost increases of incoming materials, 427 TOOL’s policy is to not provide total cost information to customers.  Roger delivers the cost increase information, and further discussions are delayed by BIGWERKS until the new year.

January 2014

Discussions start heating up. Roger is holding tight on the price negotiations. He continues to communicate with Justin to maintain momentum in communications and send the message that 427 TOOL is not retreating on this issue. It has been five months since negotiations began.

Justin shares a critical revelation in one of his telephone calls with Roger: He tells Roger that BIGWERKS really does not want to lose 427 TOOL as a supplier. This knowledge instills renewed confidence in Roger and spurs him to continue on his path.

Then Justin reveals a surprise. He states that BIGWERKS corporate has mandated price reductions from all suppliers in 2014. Is this a real mandate or just an attempt to offset the increase? Roger recognizes that BIGWERKS is trying either to thwart the increase completely and actually get a price decrease, or to use the mandate to negotiate a non-increase. Roger will not settle for either of these options. He and the management team at 427 TOOL are committed to getting the increase. (Management commitment is a key component to any price improvement initiative.)

Roger presses on relentlessly for the price increase. Intense discussions continue over a two-week period. Justin announces that the BIGWERKS division vice president will participate in the next telephone discussion. Roger decides to add to his own horsepower and invites 427 TOOL’s president to participate in this phone conference.

The conference call lasts nearly two hours. 427 TOOL holds their ground on the increase, not wavering from the initial amount. BIGWERKS makes no offer to counter and insists on no increase. Interestingly, BIGWERKS is fighting to protect its reputation on not accepting price increases. They believe that if word gets out to the supplier base that they accepted an increase, other suppliers will attempt increases as well. Their unwillingness to counter is also noted. They are desperately defending their reputation on no increases. At this point, it’s all or nothing.

Committed to the increase, 427 TOOL continues to hold their ground and insists on the increase in whole. Finally, after nearly two hours of negotiation, BIGWERKS accepts the full increase, with only one caveat: that the increase will go into effect in June so that BIGWERKS has time to get the new pricing into their systems. 427 TOOL is happy to oblige.

WHAT JUST HAPPENED?

In a word, commitment. Sometimes it takes fortitude to get what you want in pricing negotiations. 427 TOOL hadn’t been successful in executing a price increase at BIGWERKS in seven years. This time, the supplier committed to getting the increase and showed the tenacity to not back down. BIGWERKS, based on prior experiences, believed that 427 TOOL would eventually give up. When they didn’t, the tone was set for a new pricing relationship between the two companies.

The commitment to executing price increases at large accounts can be significant. Below is a summary of time and resources that 427 TOOL incurred during the process:

  • Number of meetings or telcons           Approximately 12
  • Time commitment                               Estimated 40 man-hours
  • Amount of increase                            $90,000
  • Time to create pricing schedule          5 hours
  • Return on time invested                     $2,250 per hour

As Roger pointed out during our interview, the price increase goes straight to 427 TOOL’s bottom line. Other than sales commissions, the increase has no other costs extracted.

Each customer and each negotiation is different. In this case, reinforcing 427 TOOL’s position on the price increase was effective. Other situations may call for different strategies. Holding the line on increases, however, is a proven approach. It takes some courage and fortitude to execute, and it may mean bringing senior-level managers into the fray, but in the long run, it sets the groundwork for a more profitable long-term relationship. 
 

How to Reward Your Sales Team for Price Performance

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For manufacturers and distributors driving toward margin improvement through pricing realization, the road to success passes through the sales team. The best pricing strategies, and the most robust pricing technologies will go nowhere unless the sales team is on board. Pricing execution at the sales level is key to realizing price improvement.

Three Key Criteria Must be Managed at the Sales Level:
  1. Build a solid pricing architecture that delivers reliable prices on every deal. Communicate your pricing strategy so that the sales team understands that the prices are optimized and will support their ability to achieve sales goals.
     
  2. Equip your sales team with value based selling techniques and tools so they can support the economic value of your offerings. Selling value negates selling on price, which is destructive to profit margins.
     
  3. Align incentives with price performance.
 
Many sales teams are still being rewarded based on increased sales volume. As sales representatives sell more, the reward, regardless of its calculation, increases, thereby encouraging sales volume. This approach does not support achievement of your profit goals. It ignores profit margins or price performance and encourages sales teams to discount unnecessarily and drive margins downward.
 
Some sales teams are rewarded based on profit margins. This is a step closer to improving price performance as pricing is a driver of profit margins. However, a review of the basic profit equation shows that cost can have a significant impact on margins:
 
Profit = (Sales Unit Volume x Price) - Cost
 
A closer look reveals that most sales teams can influence two of the three profit drivers: sales unit volume and, in many instances, price. However, most sales teams have little to no influence over costs and may coincidentally gain or lose profit margin on changing costs.
 
A solution to creating sales team incentives that reward better pricing is to focus a significant portion of the incentive on price performance. This means establishing product price targets and rewarding the rep for achieving or exceeding the target. The plan may also include a penalty for falling short on price performance goals. Of course, this assumes that reps have the ability to change prices through discounting or, in some cases, actually set prices.
 
The price performance incentive feature and the sales volume feature – the two profit drivers that the sales team can influence or control – can be combined. A 60/40 split between these ensures that both will receive proper attention by the sales team. 
 
Sales incentives alone will not drive your sales team toward profitable pricing. But once you have achieved the ideal balance of reliable price points, strong value selling tools and a proper incentive plan, they will have the confidence, capabilities and motivation to help you move your business forward toward price and margin improvement.
 

Batman Pricing Strategy, Wham! Pow!

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Last week hosted the annual Barret-Jackson automobile auction on television. This is one of the most well-known auctions for classic and collector cars in the world and they feature some of the most well-known automobiles and their owners. For example, Clark Gables 1955 Mercedes Benz Gull Wing 300SL and several Shelbys by the late Carroll Shelby.

One by one, cars parade across the auction block as bidders compete to win. Being a car guy, I spend hours watching. And being a pricing consultant, I am continually amazed at the prices that some of these cars command regardless of economic conditions.
 
But one car this year was very special. This year’s feature car was the Batmobile from the famous television show, Batman. Now, there were actually four of these cars produced for the program. One was used for stunt purposes. And, two were used for shows and displays around the country to promote the Batman brand.
 
Only one car was actually used in the TV show. This was the car that Batman and Robin used to fight crime. And, this is the car that was up for auction. The owner was George Barris, the original builder of the car. Mr. Barris has built a number of special cars for TV and movies over the years including the car for the TV show, “The Munsters”.
 
The auctioneer started the bidding at $100,000. Within 20 seconds the bidding rose to $1million. And, it didn’t stop there…
 
…$1.2 million
   …$1.4 million
      …$1.8 million      
         …$2 million
 
Bidding continued all the way up to the $2.7 million mark and stalled, but, not for long. 
 
Bidders quickly drove the price past $3 million and proceeded to cross $4 million before finally stopping at $4.2 million.
 
Wow! $4.2 million for the Batmobile!
 
You can imagine the excitement in the auction hall. You can imagine Mr. Barris’ excitement, too. He was one happy man.
 
So, what drives the price of a car like this to such an astronomical level?
 
First, it takes at least two people who want the car very badly and have the funds to throw at it. But, more importantly, the bidders must have a high value perception of the car. The winning bidder said that he grew up watching Batman and had his eye on this car for 20 years just waiting for the chance to buy it. He also said that he “knew” that he would win the car which sounds more like he was committed to buying the car.
 
This bidding environment is a great way to measure the perceived value of a product. Bidders will tell you with their bids exactly what they are willing to pay at that point in time. And, close the deal on the spot.
 
The key is to be sure that you clearly communicate the value of the product. The auctioneers took time-out during the bidding to tell people about the cars history. The bidding would temporarily stop while the auctioneers further developed the benefits and mystique behind this vehicle.
 
The key to an effective pricing strategy is to fully and clearly communicate the value of the product before establishing the price. 
 
Wham! Pow!
 

Three Key Price Increase Strategies That Work

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Increasing prices can be a daunting task for many sales professionals. The fear of losing business as a result of the increase makes many a sales rep uncomfortable especially when it comes to your biggest and best customers. The accounts that buy the most have buying power and will use that power to get the prices they want. 

 
The key to successful price increase negotiations is to be prepared. 
Deliver the price increase with information and data for support. If your prices are increasing due to cost increases, be sure to present cost information and data that supports the price increase. Independent third party information such as indexes or trade association data will go a long way to establishing credibility. 
 
And, present the increase matter-of-factly. This is no time for shyness or uncertainty. Say “The price increase is X%”. Professional buyers can smell weakness. Even if you are a little anxious about the discussion, act with confidence.
 
Despite your best efforts many buyers will still challenge a price increase. The key to effectively handling these discussions requires having a back-up strategy. 
 
Here are three back-up price increase strategies to use when the buyer says “no”:
 
  1. Defer:  Defer the increase for 30 days. Don’t take the increase off the table or reduce the amount but delay the execution for a short period of time. 
  2. Trade Value: Offer to remove some delivered benefit from the offering in trade for a lower price increase. Some products, like software, are well suited for such strategies where you can easily adjust the deliverable. For others, look at delivery, payment terms, warranty periods or service levels to adjust.
  3. Swap Products: Offer to swap the product for a lower performing but acceptable product that is lower priced. We commonly see this type of negotiation with chemical type products.
 
Being prepared for these discussions is the single most important step that you can take to make your price increase successful. Once buyers see that you are negotiating and not just rolling over on price they typically will accept the price increase.
 
Remember, buyers will first test your price, then, your resolve.
 

How Does Pricing Leverage Work for Your Company?

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We often talk about pricing leverage and how just a little price improvement can dramatically impact the bottom line. While many companies are focused on cost reduction and driving revenue the greatest gain in margin lift comes from price improvement. Of course, depending on your current level of margin performance, price lift will have a different impact on your bottom line.

Here are some publicly held companies that our pricing consultants researched to determine how much a simple 1% gain in price realization would impact their net income.
 
Company Net Income Gain
Coca Cola 5.4%
Nestle 8.8%
Ford Motor Company 4.3%
FujiFilm 24.6%

Now consider the price/earnings ratio for these companies and what a 1% price improvement would mean for their market capitalization. Let’s take Coca Cola for example. Coke has a current P/E ratio of 19.43. With revenues of $46 billion a 1% price improvement would yield an income gain of $460 million. That would translate into nearly a $8.9 billion improvement in market capitalization. Not bad for a 1% price boost.

Privately held companies are typically valued lower than Coke’s P/E. But, you will still see a dramatic improvement in your company value.

To see the impact of a 1% realization for your company click on our Pricing Leverage Margin Calculator.

This handy tool is easy to use and will show you exactly how an improvement in price will impact your bottom line.

Pricing Segmentation at the Heart of Pricing Strategy

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Not all prices are created equal. That may sound like a strange statement but stay with me on this one. As manufacturers and distributors think about setting prices for products and services in B2B industries there are a huge number of factors that will determine what price a buyer is willing to pay. Specifically, what is the optimal price point that allows you to close the sale while capturing the most margin?

Consider a specialized bearing. This item may be used in a variety of applications from aerospace landing gear to production machinery to oil and gas equipment. Each application has its own unique needs and issues that the bearing will address. 
 
Beyond the application requirements lies a host of other factors that may enter the price equation, such as:
  • Speed of delivery
  • Technical service requirements
  • Size of the customer
  • Buyer skill set
  • Payment terms
  • Etc.
 
In order to arrive at an optimized price each of these factors, and perhaps others, need to be considered in the price decision. 
 
As we consider various factors we can easily see that a “one size fits all” price will not apply. In fact, it is likely that any single SKU may have multiple prices for any given situation. We have seen businesses with thousands of price points for just a few hundred SKUs.
 
Complex? Yes, but the user interface can be simplified for the field sales team and the company is able to capture more sales and higher margin by having customized prices for a variety of pricing segments.
 
The key is to identify the critical pricing segments that will drive price differentiation based on buyer differentiation. A simple starting point is to look at your product offering and segment product families into “buckets” from commodity products to high value products and price accordingly. Other price drivers like markets and customer price sensitivity can be added later.
 

Should You Respond to that RFP?

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You just received a request for proposal (RFP) from a huge company that you have been chasing for some time. If you land this large order, it would go a long way toward helping you achieve your revenue goals. The volumes are downright intoxicating, and it would be great to add this customer’s logo to your list of accounts.

Sound like a great opportunity?  Well, maybe yes and maybe no.

Fact: Only 55% of all RFPs are awarded. That means that nearly half of buyers will never place an order. Often they are just shopping for price or leveraging low-priced proposals to reduce prices with their existing supplier. Don’t assume that every RFP will be awarded. Many won’t.

Also, consider the substantial amount of time and effort that is required to develop some proposals. One supplier recently developed a proposal for a chance at $80 million in new business. It took a team of four specialists nearly five months to create the proposal. That investment of time and talent could turn into a significant loss if the deal doesn’t go through.

RFPs and Pricing Strategy
Winning business through RFPs can certainly drive revenues. In some businesses or with some customers, it may be the only way to win business. But keep this important point in mind: For most RFPs, price will play a heavy role in the buying decision. In some cases, it may be the only criterion.

If your company delivers high value and can easily distinguish itself from the competition, you may choose to pass on responding to RFPs. We know of many companies that exercise this policy as a way to help maintain price levels in their industry.

If you choose to participate in bids, ask yourself the following questions before deciding which RFPs merit your consideration. An evaluation based on these issues will help you choose the RFPs you are most likely to win.

10 Questions Manufacturers and Distributors Should Answer Before Quoting

  1. Does a high level of trust exist between the customer and us?
  2. Were we involved in designing the RFP?
  3. Have we done business with this company before?
  4. Is the customer dissatisfied with its current supplier?
  5. Do we know the customer’s entire management team?
  6. Does the RFP fit into our overall strategic plan?
  7. Will participation in the RFP help us gain new access within the account?
  8. Do we know all the competitors?
  9. Do we have a good reputation with the customer or in the industry?
  10. Has a budget been established for the project?

If the answers to the above questions are positive, consider selective participation only when the deal provides a contribution to fixed costs AND does not undermine more profitable business with other customers AND does not negatively impact operations capacity.

Finally, beware of “Winner’s Curse,” which states that the higher the number of bidders, the higher the probability the winner will lose money on the deal.

Being selective about responding to RFPs is a sure way to increase revenues and reduce the time inherent in developing proposals. The key is to exercise discipline and be willing to say no when the opportunity is less than opportune.

What is Value Management? (And Why Should You Care?)

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NOTE: This article is an excerpt from a paper written by an open group of value management practitioners and  consultants who are interested in promoting value management. Several experts in the field collaborated on the paper and made it available for publication.

Value management and its related disciplines has become a hot topic in the business press, within leading companies and among pricing consultants. Its advocates assert that value creation and capture can and should be what companies try to optimize and around which they should be organized. By value is meant the value provided to customers, not the value extracted from customers or shareholder value.

Value management is a holistic discipline that supports the cycle of Create → Communicate → Capture → Assess of Value all based on a foundation of Understanding as is summarized in Figure 1: The Value Management Cycle.
  Figure 1: The Value Management Cycle
Figure 1: The Value Management Cycle
 
 
What is Value and how do I understand it?
  • Value can be a slippery term and it is used in many different ways. In value management the term is understood as follows:
  • Value is relative to an alternative – value cannot be judged in isolation
  • Value is composite and decomposable – value can be analyzed into a set of value drivers
  • There is more than one aspect of value – in B2B the most important aspect is the economic impact but other aspects such as the emotional, environmental and social can also be considered
  • Value can be quantified – economic value can be quantified in a currency, other aspects have their own forms of quantification such as Quality Adjusted Life Years in healthcare or Carbon Footprint for green solutions
     
The standard way to quantify economic value is shown in Figure 2: A Standard Economic Value Model.
Figure 2: A Standard Economic Value Model
 
  • There should be a mapping from the value metric (the way in which the customer gets value) to the pricing metric (the way in which the seller charges for value)
  • Value is realized in exchanges across networks and not in isolation
Value management relies on information about customers, competitors, external factors, offers and costs from both inside and outside the organization to build understanding (both perspectives are mandatory).
 

Price Increases: Advanced Notice or Not?

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When distributors are planning price increases should they provide an advanced notice to their customers as part of their overall pricing strategy?

In most cases, the distributor pricing strategists at Price Point Partners find that an informal communication to your biggest and best customers helps the increase discussion go more smoothly. 
 
 
Consider a verbal “heads-up” that your company is planning an increase 30 days in advance of the formal announcement. No specific details need to be presented or discussed. Simply mentioning that an increase within a certain range is coming goes a long way to getting the OK later on.
 
Some sales professionals believe that an advanced notice only gives buyers time to find alternative sources. We find this not to be true. Buyers are faced with price increases on a regular basis. And, many buyers are more concerned about selling the price increase to their management. Giving them some time and detailed information supporting the increase helps the buyer resolve any internal issues.
 
Of course, not all customers need the advanced notice. Save this only for your big accounts. Small accounts can be addressed at the time of the formal announcement and most can be addressed in writing.
 

How Much Are Price Based Margin Leaks Costing You? Here’s How to Stop Them

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Every manufacturer and distributor we have ever met has been leaking profit margin through pricing execution. Some leak just a little margin, while others are leaking a waterfall of profits that are never realized. These profit leaks are typically equal to 2 to 4 margin points – that is, $200,000 to $400,000 on every $10 million in revenue. In most cases, management is unaware of these leaks because they lack the awareness and visibility to identify where price leakage occurs.

A myriad of price leakage sources exist, including under-optimized prices, unrealized freight charges, insufficient recovery of handling costs and giveaways. You can begin to identify your leakage sources through four analyses that are relatively easy to execute provided you have access to historical pricing data taken from invoices. These simple starting points enable you to capture incremental pricing revenue that can fuel additional and more sophisticated analysis later. Starting points:
 
  1. Take a careful look at negative-margin customer transactions. While most manufacturers and distributors believe that they have a handle on this issue, many are surprised to see how much business is being shipped at negative margins. We recently completed an analysis for a $100 million manufacturer who had over $250,000 in negative margin transactions. There were two choices for remediation: “fire” the customer or raise the price to an acceptable level. Either would stop the bleeding.
     
  2. Extend your margin analysis to low-margin transactions. Determine the margin floor – that is, the minimum margin you are willing to accept. Identify all transactions that lie below this minimum, and adjust them to an acceptable level. Keep in mind that the margin floor is not a target; rather, it is your minimum threshold.
     
  3. Small accounts are often a major source of margin leakage. Many of these accounts get low prices that should be reserved for much larger customers. Analyze which of these accounts are getting prices much lower than their peers. Look for price levels normally reserved for much larger accounts. Small accounts are rarely on management radar screen and tend to go unnoticed. Lifting prices on these accounts is low-risk and easy to execute.
     
  4. Determine whether you are getting the most from high-value products. While commodity products may be the core of your business and require careful pricing attention, higher-value products that are customized or have a niche focus may be ripe for premium prices. Segment your product families into categories from commodity to high-value, and look closely at the respective pricing. Scale your price levels according to value, and ensure that your marketing and sales teams are effectively communicating the value.
 
Stopping price leaks can have a dramatic impact on your bottom line. And, getting started is relatively easy. For additional help in capturing margin through price leakage elimination, call the pricing experts at PricePoint Partners: 330-342-0923.
 

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