The Game Buyers Play with Vendors

Reed K. Holden | July 26, 2012

Selling isn’t as fun as it used to be.

There was a time when customers wanted to trust their suppliers. They expected salespeople to take care of them. For the supplier, selling was all about figuring out what and how the customer wanted to buy. Relations between the two sides were cordial.

But that type of customer — the relationship buyer — has been in steady decline, replaced by the economic buyer, who is in the grip of Procurement. The economic buyer focuses on price and value, is brutal about the buying process, browbeats the supplier, and puts the salesperson through head games. That’s because Procurement’s goal is to get the lowest price, relationships be damned.

Suppliers are bending over backward to cater to this new breed of buyer. They’re spending millions trying to shift the selling focus to “understanding customer value.” But suppliers’ executives are missing an important fact about economic buyers: Most of them are playing poker with their suppliers. The goal of this high-stakes game is to get better prices by bluffing and intimidating vendors, and the buyers are winning.

A vendor can achieve a better balance of power by recognizing that the negotiation with the buyer is a game and by understanding that the customer is often trying to put the supplier into one of two roles: the rabbit or the advantaged player. Each role requires its own sales strategy.

The rabbit is included in the bidding process for the sole purpose of driving down another vendor’s — the preferred vendor’s — price. Because the rabbit’s presence is essential to this tactic, the rabbit will be told that it has a very good chance of winning the business. Nothing could be further from the truth.

A partner at a large financial services firm in the U.S. — I’ll call him Bill Jenson — had been trying to do business with a domestic manufacturer that had a close relationship with one of his competitors. The potential customer’s VP of finance contacted Bill and asked him to prepare a proposal for a multimillion-dollar initiative. Bill and a team spent several months preparing the bid. It was a work of art, and the price was 30% below the competitor’s. But the competitor matched the price and won the business, an outcome that had been preordained. Throughout the process, Bill was never allowed to meet with the decision maker, the CFO. Bill’s effort was a waste of time for his firm.

The advantaged player is a different kind of victim. The advantaged player is the buyer’s preferred vendor, but you’d never know that from the way it’s treated. First, the advantaged player is thrown into a bid with a warren of rabbits. Second, delays occur. Third, phone calls aren’t returned. All these tactics are designed to rattle the advantaged player and get it to reduce the price.

Consider a sales engineer I’ll call Martha Williams, who worked for a process-control design firm. She had a good relationship with the CEO of a medium-sized chemical company and had done a lot of work with the customer over the years. The chemical firm’s CEO asked her to prepare a bid for a new production line that the buyer needed to install quickly. Martha quoted a price of $300,000. She was lucky: The buyer didn’t trot out the rabbits or the delays, but the CEO said that if she reduced the price to $200,000, she could start work immediately. Martha held firm. She said the original price was fair, and she couldn’t discount it. The following day, the CEO folded and placed an order for the work at the full price of $300,000.

It’s often hard to tell when a buyer is playing games with you, but here are a few signs that you’re being set up as a rabbit:

You’re asked to bid on a type of work with which you have no prior experience.

You’re invited late in the bid process, and have just a few days to respond.

The buyer blocks or limits your access to the real decision maker, whoever that may be.

Or as an advantaged player:

You know you have the best solution for the client.

Nevertheless, you have to undergo an extensive approval process because Procurement requires it.

During that process, the buyer tells you that all competitors are the same or compares your price to an inferior competitor’s.

The buyer threatens to put the order out to bid.

Once you figure out how you’re being played, the sales strategies are simple. If you’re a rabbit, you’ve got two choices. You can ask tough qualifying questions to try to become a serious contender for the business, or you can walk away and not waste your time. If you’re an advantaged player, you should bluff. The only question is whether you want to bluff hard, as Martha did, and stick to your price. The alternative is soft bluffing. In Martha’s case, a soft bluff would have involved saying “We’d be happy to meet your $200,000 budget, but we wouldn’t be able to include the process-control design for the production line.” Either way, Martha protects her price and her value, and wins — at least this hand.

QUIZ: Lower the Price or Sell Value?

By Geoffrey James | May 5, 2009

Scenario: You’ve got a product that that’s massively better than the competition AND costs you massively less to manufacture.  Do you lower the price to reflect your lower costs?  Or do you raise the price over the competition to reflect your product’s superior value to them?  Please vote:

Poll

What’s your best move?

Undercut the competition’s price.

Match the competition’s price.

Raise prices above the competition’s.

The correct answer is: #1: Undercut the competition’s price!

 

Under normal circumstances, this would be foolish because it leaves money on the table.  However, the sudden appearance of a product that is both massively superior quality and massively cheaper to manufacture always creates what’s called a “market disruption.”  That’s a fancy way of saying that the new product (yours!) is going to completely replace the old product (theirs!), usually quite quickly.

In this kind of situation, your competitors aren’t the companies selling the old product, because they’re dead meat no matter what happens.  Your competitors are the companies that will soon be imitating your new product, and whose products will have similar functionality and the same (or even lower!) manufacturing costs.

Unless you’re looking at making a short-term killing, your best move is to grow market share as quickly as possible so that you achieve a dominant market position.  Ideally, you want to build a massive base of loyal customers, lock up the channels with your product, establish your product as a de-facto standard, and make your product the one that defines the category.  To do that, you’ve got to lots of product quickly — essentially clobbering the older companies out of the market.

The classic example is the IBM PC.  When introduced, some IBM executives believed that the PC should be priced competitively against mainframes and minicomputers, even though it cost a fraction (dollars per computer power) to manufacture.  Under that concept, a PC would have cost around $25,000.

Instead, IBM sold the PC at around a fifth of that price.  The execs in charge of the PC group rightly understood the REAL competition wasn’t the old style of computing, but the other companies (like Apple) that were entering the PC market.  The low price of the IBM PC created massive growth of the product category, most of which IBM captured, allowing IBM to dominate the PC market for nearly a decade.

Truth to tell, though, “market disruptions” are relatively rare.  Most of the time — like when your product is marginally better or marginally cheaper to manufacture or both — it makes far more sense to sell value and take in the extra margin.  But if there’s a massive positive delta between what you’re selling and what else is available, you generally want to capture the segment before everyone else gets up to speed.

 

READERS: Anyone care to argue this point?

Competitive Bids: Should You Present First or Last?

By Geoffrey James | October 25, 2010

SCENARIO (from a Sales Machine Reader):

 

“I’m a computer services provider who does custom software development.  I have a brand new potential customer who’s interviewing my firm and two others over the span of a week.

There is no RFP, so I’m pretty sure that nobody has the inside track. Based on those interviews, the customer will award one provider with a small initial piece of work — an upgrade of their current software.

Whomever they pick then be the incumbent for a larger engagement, an important opportunity for my firm. The customer has given me a choice for when I will present over a period of a week.

Should I go first, second, or last?”

What do you think?  Here’s a poll, followed by my advice on how to win this deal:

Poll

He should take…

…the first slot.

…the middle slot.

…the last slot.

The correct answer is, of course, …the last slot. The reason is simple — it allows you to position your offering more competitively.  Here’s a simple, five step program:

• STEP #1: Secure the final slot. Do this now! Don’t wait, because if you don’t take, it the other guys will.
• STEP #2: Pump the software vendor. Call the software vendor and find out everything that you can about the customer. Trying to find out any inside information about how they want the upgrade conducted and the nature of the follow-on engagement.  The more you find out, the better you’ll be able to address the real challenge (the bigger engagement) in your presentation.
• STEP #3: Research the competition. Find out from the vendor or the customer the firms that you’re competing against and, if possible, the names of the sales reps who are working the account.  Research their corporate websites and check the LinkedIn connections of the competitive reps.  Find out if they have an inside track or inside connections. (See “Competition in a New Account” for more information on how to do this.)
• STEP #4: Monitor the other presentations. As far as possible, find out what the competition said when they presented.  Once again, the more you find out, the better prepared you’ll be to address the competitive threat.
• STEP #5: Customize your presentation.  Based on all of the above, build a presentation that plays to the strengths of your firm and shows why the approach that the competition will take is going to cause problems.  Remember to address the entire project (not just the loss-leader upgrade) because that’s the business that you’re really competiting for.

Keep us posted!

Should You “Obligate” a Prospect with a Gift?

By Geoffrey James | December 6, 2010

SCENARIO: You’re selling a fairly big-ticket item but having trouble getting your prospects to agree to meet with you.  Your manager suggests that, in order to increase your conversion rate, you should, prior to contacting each lead, send each prospect an “obligator” – a small gift that obligates him to meet with you.  He tells you that you must accompany the gift with a statement that the gift “does not obligate the suspect in any way.”

Here’s a poll.  To read my opinion, click on the link below.

Poll

Is this a good idea?

Yes.

No.

There is, in fact, substantial evidence in direct mail marketing that this technique does work.  When charity mailings are done with address stickers, for example, they garner a high response rate that is statistically significant.

That being said, I don’t think it’s all that an effective ploy for big ticket items.  First of all, if you’re selling something of great value, you’re probably selling to a fairly sophisticated buyer, who is probably not going to care all that much about whatever “gift” you’ve sent.

Furthermore, the technique feels, well…, downscale and kinda sleazy.  The statement that the item “does not obligate” is a lie, because socially such a gift does entail a certain amount of obligation, or is at least an attempt to command it.

It’s never a good idea to begin a relationship with a lie, IMHO.

On the other hand, you might get away with it, if you used a little bit of self-deprecatory humor.  Maybe if you positioned the gift by explaining that your boss said you should send it and then speculating on the likelihood of whether it will work.  Example:

“I don’t know about you, but whenever somebody sends ME an imitation gold pen, I’m ready to meet with them to spend $1 million on brand new software.”

That might work.  What do you think?

READERS: Any comments on this technique?  I know it’s been around, like, forever, so I gotta believe that must work sometimes.

Sales Quiz: Which Response Creates Competitive Advantage?

By Geoffrey James | June 3, 2010

SCENARIO: During your first meeting, a sales prospect keeps bringing up a particularly competitor and praising their offerings. You know your competitive advantage and understand the strengths and weaknesses of every product in your market. You happen to know that the competitor the prospect is praising has some major problems.

Here are your choices:

• Strategy #1: Hold your peace. Commenting on a competitor makes you look small and petty.  Thus, it’s best to maintain a respectful silence and refuse to comment.
• Strategy #2: Be Entirely Honest. Once the prospect knows what YOU know, he’ll thank for your honesty. You owe it to the prospect to keep him from making a bad decision.
• Strategy #3: Plant a Landmine. Ask a question or two that, when answered by the competitor, might cause the customer to see the competitor’s offering in a different light.
• Strategy #4: Stall for Time. The competition may already have a lock on the deal, so your best bet is to keep the conversation going until you figure out what’s really going on.

 

Poll

What’s Your Best Strategy

#1: Hold Your Peace

#2: Be Entirely Honest

#3: Plant a Landmine.

#4: Stall for Time

The best answer is Strategy #3: Plant a Landmine.

The challenge here is that you have knowledge that the prospect really does need to know, but you’re in a situation where sharing that knowledge outright is politically unpalatable.

If you do nothing (Strategy #1), you’re potentially screwing the prospect, because he could end up buying from that competitor.

If you rubbish the competition (Strategy #2), you’ll probably lose the sale, because that really does make you look like a jerk.

If you stall for time (Strategy #3), you’re just putting off the inevitable, because you’re going to have to get do something, sooner or later.

So what you do is ask some questions that attempt to reframe the competition’s offerings in a different light. Ideally, you do this in a way that causes the prospect to independently come to the conclusion that the competitor’s products aren’t appropriate.

For example, suppose you know that the competitive product experiences a much-larger-than-average down time at 5% of their sites.

Rather than saying something like “Their product is always crashing,” ask something like “How important to you is 24/7 uptime?”

When the answer is “very important”, say: “then you’ll want to check the uptime performance of any products that you consider.” (So far this is basic selling.)

Now comes the landmine part…

Say something like: “When you’re talking to vendors, be sure that they don’t try to pawn off their ‘average uptime’ as being their real uptime.  Some vendors have a few problem sites that are responsible for 99% of their downtime.  The last thing you want is to be one of those sites.”

Tick, tick, tick, tick, tick…

Next time the competitive sales rep comes in, the prospect will ask about uptime and the rep will start talking about average uptime.  Ka-boom!  That rep just lost all credibility and you’re back on top.

Needless to say, you can only do this if you’re really strong in the competitive intelligence arena.  But if you know your stuff, there’s no competitive technique that’s more effective.

QUIZ: Should You Offer a Freebie?

By Geoffrey James | May 6, 2009

Scenario: Due to economic conditions, you’re having trouble selling your flagship product.  You’re certain that when the economy improves, sales will recover.  However, you can’t drop the price, even temporarily, because you’d lose money on each sale.  Luckily, you have another, not-as-strategic product that you can offer as a “two for one” freebie along with the flagship product.  Please vote:

Poll

What is the most likely result:

Customers will consider the package a good value.

Customers will no longer value the “freebie” product.

Customers will no longer value the flagship product.

Customers will consider the package a lousy value.

Two answers are correct.

The first correct answer is “Customers will no longer value the freebie product.“  By giving it away for free you’re essentially saying it’s not worth paying for.  In the future, you’ll find it difficult, if not impossible, to get money from anyone remembers the freebie offer.

The second (and surprising) correct answer is “Customers will no longer value the flagship product.” According to scientific research published the Journal of Consumer Research and quoted in the New York Times, customers believe that something must be wrong with a product if you have to offer a “two for one” deal to get them to buy.

This is not to say that they’ll think the flagship product is worthless, but they’ll be much less willing to pay full price in the future, once they’ve seen it offered with the freebie.

The answer “Customers will consider the package a good value” is incorrect, because customers are more likely to think that the new price (i.e. the bundle) is simply the price that matches the actual value of BOTH products.

And the answer “Customers will consider the package a lousy value” isn’t correct for exactly the same reason.  Essentially, by offering the freebie, you’ve changed the customer perception of value to match the price of the package.  Kapeesh?

 

READERS: Have you ever used a “two for one” offer to generate sales?  Did your experience square with what the researchers found?

Selling Value Does Not Mean Discounting

By Geoffrey James | March 1, 2009

Confession: I put a mental “Easter egg” in the post “QUIZ: Why Would a Firm Buy from YOU?“  To describe the term “PRICE”, I purposely used a standard definition of “VALUE” — “the ability to offer the most for the money”.   I did this because that popular notion of value is flawed and I knew it was only a matter of time before somebody said something.  Here’s the inevitable comment:

Arguing on semantics here.  “Price: Your ability to offer the most for the money” is what was written, NOT to “offer the lowest price”… I would argue that is always important to offer the most, (benefits, quality), for a given price, especially if the price is higher than the competition.

No, no, no.   Bad idea.  You’re falling into the trap of treating value as a function of price (value=features/price).  When you define value that way, you end up discounting without realizing that you’re doing it. Here’s why:

Let’s start with the simplest example.  Suppose product “A” and product “B” have identical features, but product “A” is higher quality than product “B.”  If they sell for the exact same price, under your definition, product “B” is the better value.  But, in fact, because you’re selling them at the same price, and the quality built into product “B” increased the cost of goods, you’re actually offering product “B” at a discount.

If, however, you increase the price of product “B” to reflect the additional quality, it has the exact same value as product “A” because the customer is now paying for the additional quality.

In other words, your definition of “value” is simply a definition of full price, and pricing with discounting.  Therefore, when you’re selling “value” you’re either simply discounting or selling at the appropriate price.  So value and price are essentially identical, except for the amount of discounting you can offer the customer.

Welcome to a price war.

What you need is a more sophisticated notion of value.  One that isn’t exactly proportional to the price.

For example, suppose product “A”, which is low quality and has 2 features, costs twice as much as product “B”, which is high quality and has 20 features.  If those two features are truly unique to product “A” and solve a gigantic customer problem, then product “A” is being UNDERPRICED.  It should be four to ten times as much as product “B”.

Of course, the sales rep for product “A” is going to have to do some work to help the customer understand why those two features are so important.  And there’s always a danger that the customer will be hypnotized by the bells and whistles (i.e. useless features) in product “B”.

But if the sales rep for product “A” does his or her job correctly, the higher price becomes largely meaningless.

In other words, “value” is not about the value of the product.  It is about the value of the product to the customer.

Value is also related to intangible issues.  For example, let’s suppose product “A” is identical to product “B” but costs more.  If the customer trusts the sales rep (and firm) for product “A” more than the sales rep (and firm) for product “B”, there’s a good chance the customer will buy product “A.”  That’s because the intangible of “trust” has value to the customer.

READERS: Have I made myself clear on this point?  Are some of you still hypnotized by the notion that you should create value through discounting.

QUIZ: Do You Know How to Sell Value?

By Geoffrey James | June 2, 2009

Scenario: Your prospects are buying from your competitor because their offering costs less.  However, your offering is higher quality in every way and has some cool features that cost a bit extra.  Your manager’s advice is simply to “sell more value.”

Poll

Your Best Move Is:

Bundle: Add value by including free features.

Probe: Add value by asking the customer questions.

Discount: Add value by dropping your price.

The correct answer is:

Probe: Add value by asking the customer questions.

Before I explain, let’s look at the other two alternatives.

Discount: offer more value by dropping your price. There’s no question that dropping your price will put you back into the running against that competitor.  Customers faced with a choice between a Yugo and a Ferrari at the same price will choose the Ferrari every time — even if they only need a Yugo.  Unfortunately, discounting plays havoc with profitability, because you can’t make money selling a Ferrari at a Yugo price point.  So this is only a last resort and not your best move.

Bundle: offer more value by including free features. Conventional wisdom says that “selling value” means “offering more product for a given price.”  Under this way of thinking, you win the sale by including more “value” (features, benefits, quality, etc.) so that the customer picks your product, even if it costs a little more.  However, that’s just another way to discount, while pretending you’re not discounting. The extra features cost money to build.  If you bundle them in and don’t raise the price, you’re simply discounting the price of the entire package.  And once again, you’re sacrificing profit to make the sale, so this is only a last-ditch move, not your best move.

The real problem is that you don’t understand your customer, and because of that, you’re letting yourself get trapped into selling on price rather value.

Here’s the big secret: Selling value must be decoupled from the price.

For example, suppose Product “A” is has 2 features and is low quality, while Product “B” has 20 features and is high quality.  Product “A” costs twice as much as product “B”, so Product “B” has more value, right?

Not necessarily.  If those 2 features in Product “A” are unique to Product “A” and are able to uniquely solve a particular customer problem, then Product “A” has more value to the customer than Product “B”.  In this case, “selling value” is the process by which the sales rep for Product “A” brings the customer around to the understanding that they simply MUST have those two features.

Here’s another example.  Suppose Product “A” and Product “B” are identical in every way, but Product “A” costs more than Product “B”.  So Product “B” has more value, right?

Not so fast!  If the customer trusts the sales rep for Product “A” more than he trusts the sales rep for Product “B”, he is more likely to purchase Product “A”.  In this case, “selling value” is the process of building a greater level of mutual trust with the customer.

In other words, “selling value” is the opposite of discounting, including the “reverse discounting” of adding more features at the same price.  “Selling value” means changing the game so that the price is no longer important.

You need to ask more questions of the customer in order to identify where your offering uniquely addresses a customer need.  That need might be financial (like something specific to the customer’s business model) or psychological (like a deep need for risk avoidance).  But unless you find it, you can’t sell value.

QUIZ: What’s The Best Pricing Strategy

By Geoffrey James | July 8, 2009

SCENARIO: You’re introducing a new product into a crowded market.  The customer does not understand this product’s internals, nor is it easy to compare features.  You have no marketing budget, but can package your product to match any pricing strategy you choose.  Your goal is to establish your brand in the market and build a loyal customer base.

Poll

WHAT’S THE BEST PRICING STRATEGY?

Strategy #1: 10 percent below the competition.

Strategy #2: Comparable to the competition.

Strategy #3: 10 percent more than the competition.

Strategy #4: Much more than the competition.

Weirdly, the correct answer is STRATEGY #4, according to most research studies.  A recent article on pricing in the New York Times explained that:

If you give people a placebo and tell them it’s a painkiller costing $2.50, they can withstand painful shocks better than if they’re told the pill costs a dime. Give them an energy drink at a discount price, and they’ll perform worse on subsequent tests than if they pay full price. If you tell them the wine they’re tasting costs $90 a bottle, then the reward centers of their brains will light up more than if you tell them it’s a $10 bottle.

The article goes on to cite studies showing that a marginal price increase (STRATEGY #3) often doesn’t work at all.  STRATEGY #2 is a loser unless your packaging is VERY creative, while STRATEGY #1 might work if your packaging successfully positions your product as a viable alternative to the existing brands.

 

READERS: Care to argue the point?

Quiz: Which Pricing Strategy is Best?

By Geoffrey James | October 23, 2009

Here’s a real-life problem sent in by a Sales Machine reader.

SCENARIO: You’re selling software to utility companies, most of which are government agencies. To be profitable, you must sell your core product for around fifteen hundred dollars per copy.  When you talk to prospects, you want to quote a price that will move the sales process forward.

Which pricing strategy is best?

• Strategy #1: Quote them $1,500.
• Strategy #2: Quote them $1,495.
• Strategy #3: Quote $1,600 then discount.

 

 

You picked: Strategy #1.

CORRECT!

When a prospect is relatively sophisticated (as in most B2B deals) playing psychological games with the price is usually wasted effort.

However — and this is important — I hope you’re not talking price up front.

It’s usually wiser to suspend that part of the discussion until after you’ve uncovered an overwhelming need for your offering.  For more on how to do this, see: “How Much is Your Solution Worth”

 

 

You picked: Strategy #2.

WRONG!

While it’s true that consumers are more likely to purchase a product if they perceive it as not passing a certain price barrier (hence $9.99 for a ten dollar product), we’re not talking about consumers here.

In fact, the “K-mart” pricing is a subtle indication that you’re not being completely honest and that you think the prospect is not very bright.

What’s more, there’s always a danger that you’ll accidentally slip and say “it’s only fourteen ninety-five” and the prospect will start thinking “$14.95″, which is whole ‘nother ball of trouble.

You picked: Strategy #3.

WRONG!

Offering a sudden discount early in the sales cycle signals to the buyer that you’re playing games.

It’s much better to give a firm price, and then hold onto it.