My post, “But Your Price Is Too High” has generated well over 100 comments between here, LinkedIn and a few other sites. The discussion has been very intense, with lots of great ideas and some challenges. But, I still am finding some confusion.
Our companies have methodologies for pricing our products and services. The price covers manufacturing costs, parts costs, warranty costs, overheads, depreciation, and a whole number of other costs we incur in designing, manufacturing, bringing a product to market and supporting it. It has to cover commissions to sales people and the channel, and it includes a margin for our profit. Our company pricing strategies may leverage strong brand reputation to drive higher margins. We price our products based on assessment of competitive products, demand, market potential, volumes and a variety of other factors. Pricing can be a very complex process, but in the end, our prices must cover all our costs and provide a profit. Without this, we cannot support the products, sustain the product line or our business.
But what does all this mean to the customer—virtually nothing. Actually they do care about our pricing and profitability, but I’ll come back to that later.
Customers don’t care about all that we’ve invested in developing our products, our costs of manufacture, support, and so forth. And they really shouldn’t–it’s none of their business. Though some procurement professionals may try to claim otherwise. Our costs are our costs. It’s the job of the entire company to be as efficient as possible in our manufacturing, development and other functions, because our competitors are trying to do so–reducing their prices.
But the customers don’t care about our costs when we discuss pricing. Customers care about the value they are getting for what they pay for.
Now here’s where it starts getting confusing. What is value? Who determines it?
For example some things we attribute to which we attribute value include performance, features, reliability, and quality. There are many more things, but these are just examples. We know the customer values these attributes because they have told us they value them. Great, we think we’re in sync and aligned. The customer will see the value of our products and accept the price (or close to it). But then the difficulty arises.
The customer wants a much lower price. We’re confused–we’re aligned on performance, features, reliability, and quality. Why are we so far apart on price? We discuss things internally–do they understand our investment in developing the product, manufacturing costs, etc.?
But the problem is that we haven’t really aligned on value. We have to do deep dives into each value element, in this case performance, features, reliability, and quality. We have to understand how the customer defines and value these attributes. While they may value performance–their definition of performance may be different than ours. For example, if our manufacturing machine produces 120 widgets per hour and they need a maximum of 80 widgets per hour–they don’t’ view the additional performance as added value, but rather as unnecessary added cost. We can go through each value element and find potential mismatches in expectation or need.
It’s really critical that we define precisely what customers value. Accepting generic terms like performance, features, reliability, and quality is a big mistake. Without understanding the specific attributes of these–from the customer’s point of view, we can be way off base.
This is very vivid in certain markets. For example, the perception of these attributes in China may be very different from ours. I’ve read a lot of discussion about how B2B buyers in China strive for absurdly low price. It is true, Chinese buyers are very tough negotiators and will get the very best price they can. But often, the problem is that what they need, want, and value is very different than what we provide. Sometimes, our products may be simply a mismatch and we have do decide how we can compete. At the same time, while they will negotiate low prices, there is a great record of companies being able to do profitable business. We just have to drill deeper into what it is they want to buy and see if we can provide just that. (There are some other complexities to doing business in that market, but I will leave those to another post.)
Our job, as sales professionals, is to reconcile these differences in perception of value. Perhaps we can change what we offer, perhaps we can persuade the customer to accept our views of certain attributes. Perhaps, we can recast the problem and value requirements in ways the customer finds meaningful and where we aligned with value definition and requirements. If we aren’t aligned in how we define and view value, specifically, then we will always be at odds with the customer in pricing.
I glibly jumped over a few issues at the start of this post. Customer do or should care about our pricing and that we are doing good business. Risk management is a key element of procurement decisions. Suppliers going out of business, suppliers who are undependable, who don’t deliver expected quality and so forth increase the risks and potential costs to the customer. A supplier that fails can cost the customers millions. Recently, the collapse of Fisker Motors is, in part, due to the collapse of a major supplier–with no alternative suppliers available (Don’t get me wrong, there are a whole lot of other reasons for their failure.).
Procurement professionals want to make sure they have reliable suppliers. Suppliers generating enough profits to continue to invest in new products, improving efficiencies and who can grow with them. So they do care about our pricing methodology and fair margins.
Some procurement professionals try to understand our cost structure. They want to understand our cost structure and manage “help” us in managing our cost structure–actually they are just trying to manage our margins. Unless we are bidding on a cost plus basis, this is nonsense. As much as they insist on this, it’s none of their business. It’s our job to manage our business to be as efficient and effective as possible. We have to demonstrate that we are doing this to our customers, but we don’t have to share our cost structure and defend it. But I’ll spend more on this in another post.
(For a great perspective of what procurement professionals are really looking for, listen to my podcast interview, “The Yin and Yang of Buying and Selling.“)