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Value Based Selling

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. 
 

Is Your Pricing in Line with Your Delivered Value?

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Does your offering hit the value target? Are your customers getting all they need at a price that results in solid value? These are questions that businesses ask our pricing consultants every day.

Value is all about the balance between the price of your offering and the benefits it delivers to customers. Perceived value is key. When an imbalance exists between delivered benefits and price, you have three options for re-establishing balance: (1) Lower the price to bring balance back in line, (2) Increase the benefits to be in line with the price, or (3) Adjust price and benefits together to achieve a value balance.

How do you know if you have a value imbalance? Our pricing consultants find that the most common way is to talk with your customers about value. Customers actually like to talk about their needs and what they value, so these are easy discussions to initiate. Most often, these discussions are conducted within the framework of market or pricing research. This type of research is different from customer satisfaction as it focuses on the potential gap between benefits offered and price.

Here are three key efforts that should be included in value-based research:

  • Gauge Perceptions - Perceptions are more important than reality. Never mind your offering’s actual price; ask customers how the offering impacts their business. What financial gain do customers realize from your offering? How does it help them increase revenues, reduce costs or reduce risk? These are the pillars of business value: At least one should be delivered in every offering.

 

  • Understand the NBA - And we don’t mean basketball. What is the Next Best Alternative to your offering? If the customer stopped using your offering, what would they use in its place? How does the alternative compare in benefits and value to your offering? Ask your customers: They will almost always be up front and honest about alternatives. Then you will know exactly how your value compares.

 

  • Talk Price - You can talk about price without talking about price. The word “value” is a great surrogate for price. Ask customers to rate the value of your offering on a numerical scale. If the rating is low, it is a strong indication that an imbalance between benefits and price exists. If the rating is very high, you may be leaving money on the table. Either way you will know the action you can take to remedy the situation. Remember that you can adjust benefits or price to bring value in line.

Having value discussions is critical in new product launches as well as in realigning existing offerings. Often, we find that opportunities for product versioning surfaces when we learn that different segments of users have different needs and value products differently.

Go ahead: Talk with your customers about value. They will thank you for it.

Why Peanut Butter and Pricing Strategies Don’t Mix

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Are you applying a “peanut butter” pricing strategy to your business? Put another way, are you spreading the same price for each product or service across all customers or all markets?

This approach, also called mono-price-eosis, falls short of recognizing the differences in price sensitivity across differing customers and markets. Nearly every customer perceives the value of your offering in a slightly different way. The key to optimizing prices is to recognize these differences and price accordingly. The same applies to different market segments.  
 
Different needs and different application for the same products should warrant price differentiation. If you look at all the possible applications for your product by all the different customers you will quickly see a matrix develop that can become the foundation for an optimized pricing architecture. This is called price segmentation.
 
Take for example the manufacturer of candy. This company has 500 SKUs, eight different markets and 2,000 customers. In the end, after careful analysis of each of these price drivers, the company resulted in 11,000 different prices for the 500 SKUs. While this may sound complex, the user interface for the pricing system was simplified for rapid quoting and ordering.
 
Take it from the price consulting team at Price Point Partners, make sure to look carefully look at your pricing and determine which markets and customers can support different prices. This may be the beginning of your price optimization program.
 

Price Increases: It’s All in the Preparation

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Depending on the industry that you participate in, increasing prices may be an annual part of the industry culture or it may not. Some industries increase prices on a consistent annual basis.

These pricing strategies actually train the buyer to accept increases and reduce the push back seen in industries that change price infrequently.

The key to getting customers to accept increases lies in the preparation. Here are a few helpful hints from the pricing consultants at PricePoint Partners to making your price increase go smoothly.

  • If you are raising prices due to cost increases, be prepared to share your actual cost increases with the customer. However, only use this data if necessary. Present supporting cost data only after the buyer has resisted the increase.
     
  • Be sure that your sales team is well prepared for price negotiations. Equip them with several backup strategies in the event of buyer push back. If the buyer resists, consider deferring the increase for 30 days. Or, removing something from the deliverable that reduces the value of the product. Sales professionals will present price increases with confidence when they know they have a strong back up plan.
     
  • Customers don’t like surprises. Let them know that an increase is coming. This will make the announcement more palatable.
     
  • Practice your price increase presentation with smaller customers first. This gives you the chance to practice and develops confidence when it’s time to present to your biggest customers.

As in any competition, preparation is the key to getting the very best results. Take it from the pricing experts at PricePoint Partners, spend the extra time to prepare for price increases, and you will see your net realized increase improve.

 

Maximize Margins by Pricing Products to Value, but Will They Sell?

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Price Your Products to Value, But Don’t Stop There

Pricing your product offerings to value, that is, determining economic value to your customers and pricing accordingly is key to maximizing margins. However, setting a value based price is only one part of the entire value capturing process.

One of the most critical and overlooked aspects of value capture is at the point of execution. If the sales team is not selling on value, and specifically economic value, you will not likely capture full price. This results is a disconnect between price setting and execution.

Be sure that the customer-facing team clearly understands the product’s economic value and is able to communicate that value effectively. Many companies will do a great job of setting prices according to value but ignore the communication aspect. For specific value-based selling techniques, download our free guide: "How To Turn Your Sales Team into a Profit Engine; A White Paper for Manufacturers and Distributors."

Don’t expect the sales team to be successful at selling a product that is priced according to value when they are unable to articulate economic value to the customer. Without this ability the sales person will likely revert to price discounting to close the deal. Instead, train sales teams to sell on economic value and provide them with the data and tools to support the value.

Read more about our onsite business to business sales training program, Selling for Profit™, or contact sales training speaker and pricing expert, Ralph Zuponcic to explore how value based sales training can revitalize your sales efforts at 330.342.0923 and start Selling for Profit™ today!

Value Based Selling: Identify Your Value Inventory in 3 Steps

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In our past blog posts; "Seven Key Questions to Uncovering Economic Value" and "Value Based Selling: Win Price Negotiations on Value," we provided value based selling techniques to help manufacturers and distributors maximize profits during price negotiations.  Our pricing experts direct on how to use the value your product or service brings to the buyer to get the price you deserve.  So how do you quantify the value your product or service delivers?

Value for manufacturers and distributors is comprised of a number of elements designed to deliver benefits to the customer. A basic value framework consists of two elements that are measurable and one that is not. Measurable elements include items that reduce business costs or risks and increase business performance.

1) Quantify reductions in business costs or risks:

• Labor costs
• Transportation costs
• Material costs
• Product or manufacturing defect rates
• Floor space requirements
• Warranty returns

Each of these elements is easily measurable and can be presented to the buyer in quantitative terms.

2) Quantify increases in business performance:

• Orders
• Sales
• Throughput
• Cash flow
• Profit margins
• Web-based inquiries

Each business has its own measurable value elements that are critical to its business success. The key is to identify the most important value points for each buyer or buying influence.

Finally, intangible benefits may be considered. However, the inability to measure these features makes it difficult to consider when selling economic value.

3) Emphasize additional intangible benefits:

• Innovation
• Morale
• Reputation
• Brand awareness
• Employee retention

It is very worthwhile to spend time with your team identifying all of the economic value elements your company delivers to customers. You may be surprised at how many value elements you can identify. For best results, conduct this exercise in a team environment. And remember: Quantifiable value is key. Intangible value like morale improvement is helpful but takes a back seat to quantifiable value.

Your objective is to assemble your economic value argument in the form of an ROI or whatever metric the customer uses to make buying decisions. Rather than argue price levels with weaker intangible benefits, sellers are now in a strong position to negotiate pricing on a level playing field with the buyer. Each party is talking dollars and cents. The buyer will try to remain focused on the price point while the seller will focus on the delivered economic value.

The pricing experts at Price Point Partners deliver your manufacturing or distribution operations team with experienced advice and proprietary tools to analyze your current pricing, propose a more profitable pricing strategy and teach your sales team how to maximize profit with our Selling for Profit™ onsite business to business sales training program. Contact us for more information at 330-342-0923 or fill out our contact us form and a pricing consultant will be in touch: http://pricepointpartners.com/pricing-consultant.

Free Guide: Value Based Selling

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At Price Point Partners our pricing experts see a growing trend of buyers pushing value aside in negotiations, and prices being discounted in order to make the sale, or keep the customer.  Unfortunately, the profit margins for the seller suffer substantially in this process. Our pricing consultants estimate that unnecessary price discounts, starting at the sales level, cost manufacturers and distributors  2-4 margin points every year!

 

In other words, profit leaks at the sales level are one of the most overlooked and undermanaged threats to most manufacturers' and distributors' profitability.

 

The solution? Teach your sales people value based selling! In order to help combat excessive discounting, PricePoint Partners has created this free value based selling guide explaining how to sell value – specifically, the economic value – of your products and services. Selling economic value helps reduce discounting and improves sales close rates.   Click on the link below to access this exciting new guide.

 

How to Turn Your Sales Team into a Profit Engine
 

A White Paper for Manufacturers and Distributors

For more information about PricePoint Partners pricing consulting services and our Selling for Profit™ business to business sales training workships to enforce your value based pricing strategy with value based selling techniques, contact PricePoint Partners at 330-342-0923 or fill out your contact information here, and our pricing experts will get in touch with you.

 

 

 

Seven Key Questions to Uncovering Economic Value

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In the process of developing a value based pricing strategy, we first must understand what the customer perceives as value. Every buyer and every company is different. Even though you may be selling identical products or services to similar companies in identical markets, each has a different spin on what they value. The key is to determine precisely what they value and how the buyer will measure the value of your offering.

Digging out what buyers truly value requires asking a lot of questions. It means having a lengthy and deep dialogue with the buyer to understand their motivations for buying now. Don’t assume that you already know what they value. We often hear buyers focus on price and we can be easily led to believe that price is the only important buying criteria.

Our pricing consultants have conducted research with thousands of buyers in a wide variety of industries to determine what they really value. Price is typically ranked third or fourth behind quality, delivery and service. Remember that buyers are rewarded to reduce costs.

We find that buyers actually want to talk about what they value. They typically respond well to the salesperson who wants to know what is important to them in making a buying decision.

While the actual questions you will ask the buyer will need to be customized for your products and markets, the following are seven key questions to help you get started:

  1. How will you measure the value of this initiative/product purchase? (ROI, cost savings, etc.)
  2. What metrics will you use to measure the success of this purchase?
  3. Can you quantify the metrics for success?
  4. How will you measure success of this initiative/purchase?
  5. What business results are you trying to change? How much?
  6. What would you consider to be a “home run” in this purchase?
  7. How will you know when this initiative/purchase is a success?

The objective is to get the buyer to paint a picture of success. Once you can clearly see this picture, you will be able to synchronize your value offering to the buyer’s needs. Remember that the goal is to quantify your value offering in dollars and cents. This will position you very well when you are later faced with price negotiation challenges.

Price Point Partners is a team of senior-level pricing experts dedicated to solving the pricing challenges of manufacturers and distributors. Contact one of our price consultants to discuss your pricing challenges at 330.342.0923 or use our contact form and we'll get right back to you.

Pricing Strategy: 5 Price Resistance Guidelines

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How often do you experience price resistance from buyers in your business? In some businesses, this is a daily occurrence.  When buyers push back on price there may be any number of factors that are driving their behavior including incentives, competition and personal bargaining needs. How we react to price resistance says a lot about our own company’s self image.

Just this morning I met with a machining company owner who told a $10 billion customer that he would not accept the customer’s demand for a price cut. What happened next? The customer moved the business to a different supplier, but only for a short time. And, later returned to pay full price.

Here are 5 guidelines to help you work through price resistance issues when buyers push back:

  1. Remember that even the smallest price discounts can have a dramatic impact on profit margins. The average U.S. company will see an 11% drop in earnings with an innocent little 1% price discount. Negotiate fiercely for every percent knowing that even the smallest amounts have a meaningful impact on margins. Learn more about pricing leverage with our profit improvement calculator.
  2. Discounting your price is only one response to price objections. Trade value by reducing deliverables in the offering. Look at delivery time, payment terms, product performance reductions and other value elements in order to make up for lower prices.
  3. Don’t assume that your price is too high. Competitors may be desperate at end of fiscal periods as they drop price to meet volume goals. This may be short lived. Or, perhaps the buyer’s price expectations are too low. I recently bought a car and after visiting three dealers I realized that my price point was lower than what the dealers would agree upon. In the end, I paid a little more.
  4. Buyers will first test your price. Then, they will test your ability to adhere to that price. Professional buyers are well trained to be persistent in their demands for lower prices. However, we find that when sellers resist price cuts the buyer will often move on to the next vendor in order to meet their cost reduction goals.
  5. Like the machining company owner above, just say no. With an effective value based pricing strategy, you can answer price resistance with confidence. It's like what Warren Buffet said when emphasizing the distinction between price and value to investors; "Price is what you pay. Value is what you get." 

The key to handling price resistance is to be prepared. Have confidence in your pricing strategy, have a plan ready at all times and don’t be afraid to push back.  For help developing a more profitable pricing strategy, or for value based selling training, contact our pricing experts at 330.342.0923, or fill out our contact us form and a price expert will get back to you.

Pricing Strategy: 3 Mistakes to Avoid When Increasing Prices

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The Three Greatest Mistakes in Increasing Prices

When our price consultants initially engage with a client in the manufacturing or distributing sector to improve profits through a new pricing strategy, we occasionally uncover a history of blundering price increases.  Increasing prices is a fact of doing business for most manufacturing and distribution companies and when handling price increases with finesse, nothing to fear.  Your client-base will understand that as variable and fixed costs rise you are faced with the decision to adjust your prices in order to maintain profit margins. It’s no easy task - which is why we see so many companies realizing far less from their price increase initiatives than what they had originally planned.

So, what is actually happening that creates such disappointing results?

Here are three key mistakes that many manufacturers and distributors make in increasing prices and how to correct them:

1)  The Exception Becomes the Rule:  Management sets plans to increase prices that typically apply to nearly all customers. But, as the plan is executed the sales team argues for exceptions among their customer base. One by one, customers who were originally targeted for increases are removed from the implementation list. The list grows without anyone tracking the exceptions and by the time the increase is actually implemented a significant population of the targeted customers never see the increase.

Exceptions become the rule.

Correcting the situation requires monitoring the exceptions and placing limits. Keep a list of which exceptions are allowed and set specific requirements for approval. And, limit the number of exceptions allowed. It’s OK to just say NO.

Arming your sales people with value based selling strategies laid out in our "Five Price Negotiation Back-up Strategies - Be Prepared!" will help them present the price increases in a manner to reduce push-back and successfully navigate through buyer resistance.

2)  The Peanut Butter Approach:  Most often companies will apply a uniform price increase amount across the entire line of business. While this approach is simple, it leaves money on the table. Instead, determine precisely which products have been impacted by which specific cost increases and adjust accordingly. It doesn’t mean a different amount for each product. Apply increases to product families or product groups that have similar cost structures. The more specific you are in determining price increase amounts the easier it will be to explain and negotiate with customers.

3)  Invoicing Errors:  We are surprised at the number of companies that work hard to sell price increases that never appear on invoices. One manufacturer failed to add the increase to 30% of their customers. When they discovered the mistake six months later it was too late to reclaim the lost increase and it required that they sell the increase to the customer again.

Managing price increases requires close attention and discipline. Assign someone to manage the details and be responsible for the outcome. Monitor net realized increase amounts and manage exceptions carefully.

Wondering if your business is ready to roll out price increases? We would be happy to provide a price analysis, or bring our One-Day Pricing Workshop pricing course to your team. Contact one of our pricing consultants and we'll provide you with a free 30-minute consultation to help you determine the right path to pricing excellence.

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