April 06, 2009

What do you do when your client wants to renegotiate on price?

Most buyers are passing on the pain of budget cuts to their suppliers, they don’t have a choice.

However, some suppliers are better insulated against cuts than others, specifically those with whom relationships are strongest, satisfaction is highest and, most important of all; those who are able to quantify their impact on key business drivers.

The next group that is faring better with respect of cuts, is those suppliers adopting a proactive approach – dealing with it before receiving the purchasing departments email or phone call.

1. Ask the Hard Questions First

- Is the contract worth it? Will your company die without this contract? What is the balance of power? Is the customer a good payer? How profitable is the work?

- What is the buyer’s motivations? What are the underlying business drivers for the customer? Is it cutting costs, driving efficiencies, minding the cash, targeting non-essential costs, delaying capital projects, or maximizing revenue/value capture? Which of these is involved can have a subtle, but important impact on how to renegotiate price.

- How valuable is the relationship? How successful the renegotiation is, depends on the relationship in question. How far you are prepared to go to meet the customer’s needs depends on how important the customer is to your business. But it also depends on your assessment of how secure the customer is - what is the real financial position in the client company? Will they survive?

- What is the bottom-line impact? Go back to your project budget, your cash flow and your P&L. What impact will price cuts have? What is the impact on margins and profits of different strategies to achieve cuts of 5%, 10% and 15%? Some aspects of projects are less profitable than others, some may even be sub-contracted and deliver only small margins - target these areas for the greatest cuts.

- What is the market outlook? What are competitors charging? What is the cost of switching?

2. Strategies to Use in Renegotiation

- Prepare for the negotiation – practice lots of scenarios – ensure you have competitor pricing, use information from project reviews, come with suggestions, play good cop and bad cop, don’t decide there and then allow time to consider.

- Revisit your contract. What does your contract stipulate in terms of re-negotiation? Although you may adhere to requests for renegotiation even if not technically required under contract, timing and related issues are very important. ‘All deals are renegotiable’, but that largely depends on the bargaining power of the parties involved.

- Use the Right Parties to Renegotiate. The choice of who sits in on the re-negotiation is very important. Don’t just leave it to the person who is dealing with the account on a day to day basis. Ensure any re-negotiation is submitted for approval to the most senior level.

- Decide in advance your final negotiating position and how you are going to try to improve on it. Consider the milestones in the neogitation from your buyers perspective.

- What is the quid pro quo? With a win-win in mind what can the buyer offer in return for a price cut? For example, if you’re unhappy with the price we’ve agreed and want it cheaper then I might renegotiate for a higher volume of orders from you.

3. Key Principles To Follow:

- Adopt a win-win approach – handle it well - put yourself in the buyer’s shoes - it is not personal, its business. Once the issue of a renegotiation is raised deal with it proactively, put a process and timeline in place to address the issue.

- Pass on your savings immediately, and if you don’t have any to pass on start cutting your costs and renegotiating with your own suppliers.

- Reframe the issues in terms of value, or the impact of your solution/services on the customer’s business. Have the anticipated benefits been achieved? Have unanticipated benefits arisen? Now you know the client, the environment, etc. much better than you did when the project began, or when you crafted the proposal you can bring that learning to bear on the project and cost benefit analysis review with the purchasing/procurement officer.

- Focus on efficiencies and driving additional benefits / value. Quantify the impact your solution is having in the customer’s business and identify ways in which this can be maximized. It may seem like you are revisiting some of the earlier stages of the sales process, but re-affirming needs and payback for the customer is very important.

- Examine the total cost of the solution – your cost may only be a small proportion of the total cost to the customer. For example a software client’s price was 1.5 million, however the customer organization had allocated 50 IT staff for 12 months to the implementation project which more than doubled the budget. Targeting this area could identify a wide range of savings.

4. Find innovative ways to cut the cost
, including:

· Price differentiation – identify changes in the product / service that can have a significant impact on perceived value, that may include adjusting; support levels, feature set, scalability, etc. Some of these areas may cost very little, but greatly impact on level of perceived value.

· Simplifying the product - sometimes you have to stop adding value, as it is adding too much to your product cost.

· Re-package and re-bundle. Break down into components of value and cost.
· Target reductions in support costs, for example, improved self-service help functionality, or remote monitoring. These can all greatly reduce ongoing support costs.

· More flexible pricing (e.g. Software As A Service) or delivery models (e.g. phased implementations).
· Provide the customer with the option of self-provisioning / internal fulfillment of parts of the solution. E.g. the customer provides 2 manpower resources to reduce the implementation budget.

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