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Q&A: The Top Key to Success in Price Negotiations

October 23, 2018

Posted by Taylor Mecham

Posted in Pricing, Quantify Customer Value

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Joanne Smith is the President of Price to Profits Consulting, formally the DuPont Corporate Head of Marketing and Pricing, and the author of two books. She focuses on helping B2B companies transform their pricing performance. At DuPont she was instrumental in creating the pricing organization which transformed DuPont into weak to outstanding pricing performance. In her September Webinar, Price Negotiations: The Top Key to Success, Joanne concluded the session by answering live questions from the audience. Here are her responses:

Would you suggest businesses first work on value-in-use pricing skills, industry-level pricing, or price negotiation skills?

Great question. I emphatically want to say that if you want your best pricing and your best profits, you absolutely have to work on all sides: value-in-use, industry-level, and price negotiation. But if you were to force me to say which first because we can’t always do everything at once, then I would say it depends on your product line, the complexity of your product line, and how commoditized or special your product line is. As an example, if you have a special product line, any given product potentially has bigger uplift when we think about value-in-use, and how far we can push that price. But if you happen to have 3,000 special products, you’re doing value-in-use one product at a time so you might get bigger uplift but over a smaller volume. It may take you a longer time to get to the big dollars. When we think about market-based pricing (price negotiations) that’s affecting every single deal you can get on with that very quickly and so you’re going to see an uplift right away it may not be quite as large an uplift but it’s over a bigger volume. Saying that, if you are more commoditized I would start with the price negotiations, the market-based training. If you are more specialized, particularly if you have a couple of large products so that you can get to big dollars fast, then I might start with value-in-use pricing skills.

If you have a very experienced sales force, one that has taken sales negotiation courses, would you suggest price negotiation training?

Yes! Most of the companies that I work with just happen to have very experienced sales forces, and they come in for an all-day training and you see the body language right away: arms are crossed, kind of scowling and thinking, “Oh, what could you possibly tell me that you need eight hours for? I’ve been in this department for ten, twenty, thirty years!” Yet, very quickly, that body language turns around. It’s not uncommon for me to hear comments like, “This is the best training of my career,” which is certainly exciting to hear, but it really tells us how even our strongest closers have some room to grow as they learn about the price side of things.

You talk about segmentation and describe buyer types. You might think of that as behavioral segmentation. In building out a price negotiation playbook, how else do you look at relevant segmentation? Does understanding customer value help?

Segmentation is all about understanding value. As far as the second questions goes: no matter what segment, we must understand value and turn it into quantification. For the first question: I certainly talked about customer-needs-based in that final stage of pricing power and knowing how to negotiate. Ahead of that, you have to understand market application, because if you’re selling into electronics, automotive, and cosmetics that same product may have very different value in each. You need to understand that. You may also be in different regions of the world that have different regulations that affect value delivered. So absolutely channel, market, and region have to be in the mix before we then tailor it down at the customer-needs-based level. [Peyton Marshall, CEO of LeveragePoint], do you have any comment or add-on to that?

[Peyton’s response] Yeah, that’s a great point Joanne. If you’re value selling before you’re negotiating, you’re really identifying a lot of potential data and information that helps you segment as you go. That includes everything from customer scale, to customer market conditions, to different buyers having different problems. Sometimes a value driver resonates and sometimes it doesn’t. Different customers are making different decisions versus the status quo or versus a direct competitor. So you learn a lot in value selling that can help you in the price negotiation.

[Joanne’s response] An excellent point! if I wasn’t clear before, we never jump right to price negotiations before we’ve had that value discussion.

How does pricing for services impact your value pricing strategy?

Services are just another form of value. You have your physical products, varying services, brand reputation, reliability, the customer experience, etc. All are part of your value, and all need to be considered. If you have commoditized products and you’re a little bit better on your services, it’s not unusual to see a true commodity have a 20% premium with certain market segments just based on that service, that reliability, that reputation, etc. We want to consider services in our thinking, and follow the same methodology.

Should value follow the cost of manufacturing?

Value is in the eyes of the beholder. It’s in the eyes of the customer. That is usually not aligned with your cost of manufacturing, and let’s all hope it’s higher than our cost of manufacturing. The companies that get the highest profits do not use cost-plus pricing. That would not be your strongest lever. Having said that, even good value prices, if they have a major cost increase, can still begin to use market-based price and enter that into how they influence total market price. If the total market price goes up, and competitive pricing is going up as well, they then get yet even a higher value premium. So we don’t ignore cost, but value-in-use pricing is the superior pricing methodology over strictly cost-plus.

How do you price a product or a specialty product when you don’t have the market information available?

We often don’t have all of the data. If you pull together a cross-functional team, create some hypotheses on what that value might be and what the quantification might be (by the way, you might have to use a range if you don’t have all the information), you can very quickly figure out the most important gaps, the range around it, and get started on pricing. Then we often have to identify the critical things we’re going to take some action on, to learn a little bit more, and to refine it in the market. You can usually do this in a couple of weeks. We might use these techniques, or we may look at different yet similar products and how they’ve handled the same value, or we may use case studies as examples, etc. It’s a very complex area, but the fact that you don’t know the answer should not stop you from moving forward, because there really are some practical ways that you can get through that relatively quickly. Peyton, anything to add on that one?

[Peyton’s response] I think you’ve said it really well. You always start with with gaps in your information. Being ready to come up with hypotheses that you can confirm in customer conversations is how you build upon that available information. You have to start somewhere.

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