Editor’s Note: This post originally appeared on Chris Provines’ blog. For more information on Chris, please visit his website.
I’ve had a number of conversations recently with sales leaders facing aggressive buyers and price erosion. Buyers use the typical threat “all these products are the same, it now comes down to price.” This is a difficult situation for anyone, particularly for incumbent suppliers with some “stickiness.” By “stickiness”, I mean that the users prefer the vendor’s solution, but there’s not overwhelming evidence of difference in value compared to the next best solution.
I ask a simple question: what are the switching costs? Switching costs are the costs and risks a customer incurs when changing from one supplier or supply item to another (for a complete discussion of switching costs and negotiations – see here)
Switching costs can include, among other things,
- Inventory management
- Administrative costs
- Maverick spend or leakages
- Lost productivity
- Access to services and supplier capabilities
- Priority access to supplier innovations
The point of quantifying and using switching costs is not to make threats. Rather, the goal should be to help educate the customer and help them make an informed buying decision. If you haven’t quantified switching costs and created consequences for the customer to move business away from you, you’ve lost leverage in the negotiations.
Switching costs are real. For example, in conversations with sophisticated purchasing people, it’s clear that these buyers understand the costs and implications of switching vendors. However, if you don’t do the analysis yourself, they are unlikely to admit that there are any switching costs. So, it’s up to you to understand where you have real leverage.
Also, the understanding and importance of switching costs will differ depending on who you are talking to in the customer organization. The procurement leader may have different needs and goals as compared with the users. Therefore, one other important aspect of using switching costs is to be able to adapt your message to different buying influences in the customer organization. Switching costs can be a powerful tool to help defend your value in the face of aggressive buyers.
About Chris Provines
Christopher Provines has over twenty-four years of global experience. He began his career in hospital finance and reimbursement. After graduate school, he joined Johnson & Johnson and later moved to Siemens Healthcare. His roles have included vice-president-level positions at both companies. He has extensive global experience in a variety of functions, including strategic pricing, reimbursement, health outcomes, finance, procurement, commercial excellence, key account management, and business improvement. He is a world-leading thought leader in selling, defending, and capturing value. He is an adviser to many of the world’s leading companies. Chris has written many papers, articles, book chapters, and books. He is on the board of advisers for the Professional Pricing Society and is an award-winning adjunct professor at Rutgers University, where he teaches in the Supply Chain Management and Marketing Sciences Department. His research interests include the transformation of supply chains and the implications for suppliers.