Better Pricing Through Poker: Understanding Your Opponents in the Pricing Game
Everyone wants value. The reality is, however, that not everyone is willing to pay for it. Customers have very different ways they think about value and about vendors. Some customers want great relationships. Some only want to buy at the lowest price. Salespeople and managers need to recognize those differences and craft the right customer approaches if they don't want to waste their time and leave money on the table.
Customers have different agendas for different vendors. Each agenda and subsequent buyer behavior requires a very different offering, pricing and selling approach. We have identified four types of customers: Price Buyers, Value Buyers, Relationship Buyers, and a unique group we call Poker Playing Buyers.
These customers buy exclusively on price. They don't care about value-added enhancements, nor do they care about the fancy bells and whistles. They establish purchasing criteria for a wide range of possible vendors and make sure they qualify everyone to bid on the business. Price buyers are careful not to let themselves get committed to any particular supplier by making sure they have no switching costs. Perhaps the two best examples of price buyers are General Motors and the U.S. government. Both organizations focus on price using these tactics-to the detriment of many suppliers.
Value customers are willing to switch from one supplier to another based on their ability to improve their financial picture or impact for their clients. These customers have recognized the flaws of price-only purchasing and often have very sophisticated technical and business process people who regularly evaluate the value that alternate vendors offer. Two of the best examples of value buying are Toyota and Wal-Mart. Yes, they are at times brutal, but they have a long history of working with and supporting vendors as long as they are willing to continuously improve the cost effectiveness of their organization and will often provide technical support to their vendors so they can do that.
These customers rely on close relationships with suppliers. Relationship Buyers trust that their vendor partners will provide solutions and services the customer needs to win market share against their own competitors. A surprising result of understanding the drivers of relationship buying is that many companies see their customers as being price-oriented, yet actually have customers that want stronger relationships.
In the IT environment, only 30 percent of customers "get the relationships they want" and 70 percent said that "they want to move away from a purely transactional relationship by establishing stronger partnerships with a smaller number of preferred IT suppliers." Unfortunately, the reason some customers seem like price buyers is because the salespeople are calling on the wrong individuals in the buying company or because the salespeople cave on price so quickly customers know they can negotiate. Believe it or not, one of the biggest distinctions that relationship buyers have versus price buyers is their level of trust in their supplier. That's an important distinction, since the activities that companies need to do to develop trust are different from many of the relationship-building exercises that we see in sales programs.
Poker Playing Buyers
Poker players are into playing the pricing game. They have learned that if they focus on price, they can often get vendors to leave money on the table and still continue to provide high-value features and services. This often comes in the mature phase of a life cycle when buyers are more sophisticated and are no longer worried about getting access to the product. Poker Players know suppliers will do just about anything to get their business.
Who's Sitting Across from You?
Distinguishing among and developing sales strategies for four types of buyers is difficult enough. What complicates matters is that most companies overestimate the ratio of price buyers to value and relationship buyers. We did an experiment at one company we visited-a manufacturer of high-value electronic equipment. First we asked the salespeople to estimate the percentage of price buyers among its customers. The salespeople consulted with each other and estimated that 70 percent of their customers were price buyers. Then we did some actual research. We reviewed sales figures and interviewed a number of customers. We determined that only 30 percent of customers were price buyers.
The following story illustrates why you need to know what kind of buyer you're dealing with. We got a call from one of our clients. A senior sales executive wanted our advice to prepare for a negotiation with a large customer. The package she came up with offered to take ownership of the buyer's results. In short, the strategy was ideal for a relationship buyer. Unfortunately, we determined that the customer was a price buyer. After discussions, our conclusion suggested that her company had very little chance of winning the business from this particular buyer using the indicated strategy. We suggested she change her strategy or use her time to focus on more promising negotiations. The executive angrily rejected our recommendation and plowed ahead with her team to prepare for the battle. Two weeks later we heard they had lost the deal.
Know What to Look For
How did we know the buyer in question was a price buyer and not a relationship buyer? The triggers are not hard to detect if you know what to look for. First, the selling company was not the low-cost supplier in the business. It did offer the high value-added product in this particular business area. It did have a long-term relationship with the client, but that client had recently been purchased by a conglomerate that had a long history of price buying. Further, we learned that the buyer from the conglomerate had taken over the purchasing of particular products offered by our client and had invited a number of other companies to submit bids along with our client's. This was clearly a price buying situation, one our client was not equipped to win. Our client hadn't yet established any low-value flanking products.
With price buyers, the decision is almost always controlled by a purchasing agent. That purchasing agent will have experience in negotiating and purchasing that particular product. They will go and qualify quite a few suppliers that can meet their specifications. Those specs define the "commodity solution" in the marketplace. Their approach to dealing with suppliers can be cold and, in extreme cases, abusive.
At the opposite end of the spectrum, relationship customers tend to be mid-sized and smaller companies relying on suppliers to give them the skills in the product or service area. Here, the decision is likely driven by someone senior in the organization. For smaller companies, it may even be the president or owner. Their style in dealing with suppliers is very open-they're glad to have trusted partners and in return are as helpful to you as possible in defining their needs. Because of their loyalty, they often only have one vendor qualified for a particular area.
Value buyers want clear demonstrable value from suppliers. Accordingly, they have the internal expertise to evaluate that value to the organization or to their clients. The evaluator has technical expertise or specific experience to understand the value differences between different suppliers' offerings. Their style in dealing with vendors is somewhat open but somewhat controlling as well-they want to know what the vendor can offer but also want to control the process. Here, while the buying process may be supported or "fronted" by a purchasing agent, the real control lies with a department manager or someone in the technical staff-from IT, production, or engineering. Since value buyers need the resources to do this, they are typically mid-size to larger companies.
Playing Better Poker
Poker players frustrate most suppliers. These are the customers who want the relationship and acknowledge the real value of the offering, but know that if they put the seller up against a bunch of low-value vendors, the price will drop. Perhaps the clearest signal in dealing with a poker player is that the decision is being handled by a third-party consultant or a buyer who is relatively new to the company or the buying team. In either case, their basic premise is "watch this"-watch me make your suppliers roll over and cut price. They will often do this with a very well defined RFP. But, you need to watch the vendor list since it often includes providers who do not have the capabilities to meet the requirements of the bid. Such companies are on the list just to put downward pressure on prices.
If you really want to stop leaving money on the table and stop senseless discounting, invest in learning how to play better poker with customers. Rather than hating it, you might even start to enjoy the game. Learn to bluff and learn to get up and walk away from the table when you still hold value in your hand. Then you can confidently begin to close deals confidently and profitably.
Reed Holden, DBA, and Mark Burton are leading pricing gurus and cofounders of Holden Advisors, a consultancy that works with business-to-business firms to design and implement value-driven pricing strategies that increase profitability in highly competitive markets.