Purchasing departments in the United States spend $3 billion every year on pricing management technologies, or software, to help them better manage the prices they pay for goods and services. In contrast, selling organizations spend only $200 million every year on technologies to help them better manage the prices they charge for those goods and services.
The difference is a factor of 15:1 in favor of buyers.
Without this comparison, it may appear that buyers and sellers are well-aligned. One is buying and the other is selling. However, a significant disconnect exists between these two functions. Sellers are trained and rewarded for selling more. Buyers, on the other hand, are trained and rewarded for reducing costs. In effect, each party is playing a different game. This is precisely why buying organizations invest so heavily in technology to help them with pricing management.
When a buyer pressures a seller to discount prices, they intend to draw focus to the price point and nothing else. When salespeople fall into the trap of focusing on the price point, the buyer has essentially pulled the seller into playing his game. However, a common thread exists between these two games, and it equips the seller with a strong argument. The thread is that numbers, or economics, are common to both parties.
Determining Economic Value:
How does the seller leverage this common thread? By positioning himself, through economic value, to counter the buyer’s downward price pressure and relentless focus on the price point. What is economic value? The value in monetary or quantifiable terms that the product or service creates for the customer. The key is in effectively quantifying this value. Economic value takes form through four components. The buyer must understand how the investment or purchase:
It is very worthwhile to spend time with your sales 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. For more information on determining economic value, go to our Economic Value Analyzer page.
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. Once the seller has used the economic value analyzer to prepare an economic value to the buyer, they are now in a strong position to negotiate pricing on a level playing field. 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, incorporating value based selling tools to support a value based pricing strategy.
Understanding exactly what customers value and how they measure those value points is important and will be the subject of a future newsletter. To subscribe to the Price Point Partners monthly newsletter, subscribe here.