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A tale of two companies: The discounter and the price leader

Tweet this: New post @OnPM: "The discounter and the price leader" by @AWArmstrong http://wp.me/pXBON-2mq #prodmgmt #sales #negotiation #strategy #price

By Alan Armstrong

On Monday I met with two companies with very different approaches to price and margin. One company's sales team said:

"one of our strengths is that we are so flexible on price."

They view it as a differentiator that they are willing to get the business at almost any price.

The other company has a list price that is clearly higher than their competitors, and they will not discount. Period. In fact they agree to "most favored nation" clauses with some customers and partners that prevent them from discounting with other customers and partners.

Now, lest we prematurely dump all over Company #1, there really CAN be an argument for both strategies. Company #1, the discounter, is using price to capture market share, and if they are the low cost provider, that is a legitimate strategy. However I know a little about their business, and I suspect that increasing margin would actually be very good for them. (As a SaaS company, they have significant COGS, and sacrificing on price can destroy the gross margin. Which is usually very bad. But not always!)

Further, I believe they could significantly increase their margin. To do that they will need to identify differentiators that their buyers care about. (So many tech companies describe differentiators that fly right past their buyers. The only differentiators that matter are the ones that help your buyers in significant ways.)

But more interesting was the meeting with the price leader. This company trains its reps from the day they sign on that they simply may not discount. Every rep from their company knows it, and they just do not have that discussion with their clients.

Sound unrealistic? Let me tell you a story from one of the deals we just discussed.

The set up: Products look the same to the decision maker

Sue, the Chief Medical Officer, has two one-hour meetings to review offerings from two competing companies. In the room are 20-25 of her colleagues from hospitals across the medical system. She concludes that the products are roughly the same. However, Company B (our competitor) has a product that the doctors like and is less expensive over 5 years. The decision is easy for her: We'll go with Company B.

Company A doesn't give up that easily. Working with champions internally, they suggest that to really understand the differences, the hospital needs to spend more time with each vendor. It's not the products that matter so much, it's the engagement model. The hospital agrees. However, when they agree to spend this time, they tell Company A that they can only do so if Company A will discount. Company A's price is $190, and the buyer is asking for $150.

And so the stage is set for negotiations.

Company A has a policy to never discount. They are so committed to this policy that they have entered into legal agreements preventing them from giving new customers a better price than some of their existing customers. There may be other more colorful words for such behavior, but we will call it "confidence". We like this behavior very much.

Company A goes into their corner to discuss. They decide that this customer has two things that they really want.

First, they are moving to a new platform that Company A wants to test out, so they would be an ideal beta site. Having this client as a beta site is worth something to Company A and requires resources from the customer, so there is a real flow of value to Company A.

Second, this customer has just been acquired by a large medical system. The medical system represents about 15 other hospitals, all who will need Company A's product or one like it. The medical system is evaluating but moving very slowly. A foothold in this hospital represents a "beach head" that could set up an incumbent status across the other hospitals. This has value.

Furthermore, Company A knows that if it sells to the whole hospital system, the price to this one hospital would be more like $120, so $150 would be a good price anyway.

With this positioning in mind, Company A enters the negotiation (seller):

Seller: We have discussed your situation, and are prepared to consider your request for a lower price. However, before we can do so, we will need something from you in return.

Buyer: What did you have in mind?

Seller: You are on the new platform, and we would like you to be a beta tester for our integration with that platform. There are certain requirements about being involved in feedback sessions, reporting bugs that you find, and sometimes you will run into bugs and have to work around them. We will of course support you very closely as you do this.

Buyer: I think we would consider that.

Seller: Also we would like to showcase your implementation to the wider hospital system that just acquired you. This would mean writing up your experience into a sort of case study, and having you speak on our behalf to the CMOs in other hospitals.

Buyer: (After checking internally) Yes, we could consider that.

Seller: In that case, we would be willing to give you the product for $140. (Which was below the request of $150, but above the bulk price of $120 and above the competitors price which we think is about $125-135.)

This allowed them to get to the next step, which was the day-long proof of concept.

Second try: Differentiate or die!

In that meeting, Company A brought in experts who guided the evaluation team through a set of fairly complex decisions and actions. This was expertise not offered by the competitor, and not understood by the CMO in the 1-hour product demos. Company A had suddenly differentiated its offering, not based on its product, but by giving its customer confidence in achieving the customer's goal based on the hand-holding from Company A.

Post-game analysis

Company A won the deal. The negotiation and selling work in this example is text book. The only thing I would improve is to somehow communicate this value in the initial 1-hour presentation to avoid all the later expensive negotiation. While this is textbook sales and negotiation strategy, I don't see this behavior very often in a sales rep much less a whole sales team. I've interviewed about 250 B2B buyers in the past 2.5 years, and it is much more common to just discount our way to the deal. Such practice is cultural and can be very hard to change.

To change this behavior requires two things:

  1. Most important, it requires a culture like the one demonstrated by Company A.
  2. Negotiation skills and courage on the part of the sales reps. The second part is fairly straightforward and can be learned. But the first part (culture) comes from the top. Your company's approach to price and discounting becomes like a fingerprint that everyone recognizes and expects.

As I said at the outset here, it is perfectly legitimate to be the "low cost provider" if that is in fact your strategy. Michael Porter describes this as one of the three distinct strategic positions in a market. But beware. If this is not really your strategy, discounting is a costly path, and hard to reverse.

Here's how you can help the sales team

Product Managers and Marketers can help avoid discounts in one specific way: Study differentiation from the perspective of your buyers. Interview your wins, not just your losses. You wins will tell you what set you apart, and once you hear it enough times you can replicate it and improve your messaging across all engagements.

Good luck and send me your comments! (Email me)

Tweet this: New post @OnPM: "The discounter and the price leader" by @AWArmstrong http://wp.me/pXBON-2mq #prodmgmt #sales #negotiation #strategy #price

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