An inspiring session with Vistage UK speaker, Malcolm Smith, this week on Negotiation Skills was a timely reminder that we are generally pretty inadequate when it comes to serious negotiation.
Malcolm gave a detailed and incisive view of the whole subject with many great ideas and techniques including several on the subject of pricing. Fairly obvious, of course, because price is such an integral part of what we do in business. Moreover, it is a very contentious subject eliciting some odd views of what is the right approach.
In the end, there are three main methods of determining the price for a product or service. Firstly the time honoured (and that is about all) cost-plus. This implies that we are able to calculate accurately the total cost of making or purchasing a product (or service) and then to add what we consider to be a fair mark up.
There so many variables in that simple statement that put the whole idea of cost-plus into doubt, and many companies have foundered on the premise that they thought that knew the true cost of sales.
The next popular method is to match or go slightly below the prices generally charged in the market place. This leads to the dreadful habit of discounting to "beat the competition" when in actual fact, all it does is drive down prices and hence gross margins usually without having any impact on sales.
Finally, there is the "let's see what we can get for it" method. This requires a skin as thick as a brick wall and a certain amount of blind faith. I recall one client who when asked if his prices were reasonable replied, "Well, we like them".
So what is the answer? Malcolm is strongly of the opinion, it seems to me, that everything is up for negotiation and this implies that, for most occasions, the "let's see what we can get" method is probably the best. I understand, let it be said, that when you have to tender for a project, then blind faith does come into the reckoning and realistically only method No. 1 above is anywhere near appropriate.
If all prices are to be negotiated, then where does that leave the published price list? I have yet to see a B2B price list that isn't decimated by vast numbers of various discounts applied according to the status of the customer, and also which will allow sales personnel to adjust prices so as to get the order at any cost.
If the best way to get the best prices is by negotiation, why should we be hamstrung by a published price list, even with a range of variables built in?
Agreed, it does mean that even small deals would need to be negotiated so there may be a case for retention of fixed prices for those while, in general, all other deals should be negotiated by the sales people within certain stated parameters and after having been properly trained in the skills required.
In the end, the idea is to increase prices while delivering the highest quality of product and service and a price list, per se, can only inhibit that objective. I have offered the wonderful price/margin matrix before and if you would like a copy please email your request. It shows how much more business you have to generate if you discount and how much you can afford to lose if you increase your prices. Very illuminating!
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