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Category : Pricing

What To Do About Requests for Most-Favored Customer Clauses?

More and more customer purchase agreements include Most-Favored Customer (MFC) clauses. The customer’s goal here is to ensure that they get the very best price—as low as, or lower than, you offer to any other customer under any circumstances.

These MFC clauses are typically accompanied by additional clauses that give the customer the right to look at your costs in detail, including receipts for material purchases and labor costs.

Unfortunately, the customers who insist upon these clauses are usually the large, must-have customers that can make or break your business (because you wouldn’t agree to the MFC clause otherwise, right?). You have to find a way to give them what they want while also protecting your interests.

You might be tempted to push back on the MFC clause and refuse to include it, but I think there’s a better way to handle the situation:

  1. Let them know that you define “equipment” as hardware only
  2. Let them know that you define “products” as hardware plus the benefits and results the customer receives, which include:
  • Performance specifications (what the product is intended to do right away)
  • Payment terms
  • Delivery timing
  • Warranty
  • Field support
  • Problem solving
  • Performance improvement (what the product could do in the future)
  1. Let them know that the product they’re buying from you is unlike any other product you sell to other customers. Therefore, there is no real basis of comparison.
  2. Let them know you’ll agree to their clause as it relates to products. In other words, you agree that you won’t sell the same product—including all of the associated benefits and results, as explained above—to any other customer for less money.
  3. If the customer insists on auditing your costs, tell them you agree, but that you won’t be able to share any confidential information regarding other customers—such as costs, specs, delivery, terms, hardware, or anything else. This assures the customer that you’ll protect their confidential information as well.

That should do it.

The Value of Versioning

Customers like having choices. That’s why manufacturers of cars, computers, phones, and just about everything else offer multiple versions of products, at different prices, with different levels of value. This works because not all customers perceive value the same way, nor are they willing to pay the same price.

There are three basic kinds of buyers:

  1. Price buyers: Price is always their #1 decision criteria.
  2. Value buyers: They are openly willing to pay more for more value.
  3. Poker players: They are willing to pay for value but won’t admit it. (Most customers are poker players.)

To attract all three types of buyers, many businesses offer three well-defined and profitable versions of a product at different prices, with more bells and whistles added at each price point. This ensures that customers get what they’re willing to pay for, but not too much more. If they want more, they can move up to the next version.

The beauty of versions is that they guide the customer toward the product he or she is willing to pay for. This makes everything that follows easier because you’ve addressed price and specs up front, at the beginning of the sales process. (By the end of the sales process, you’ve invested too much time, money, and emotion to walk away, even if it’s in your best interest to do so.)

It’s human nature to want the best version at the lowest price, so it’s the salesperson’s job to figure out what is most important to the customer and steer the customer toward the best fit. Price, performance, payment terms, credit, warranty, field support, product and process improvement, and delivery can all be versioned.

You might be thinking, “Versions wouldn’t work for us because our customers give us the spec they want us to meet, and we respond to that spec.” While that may be true to some extent, remember that a spec is usually a wish list, not a list of must-haves. Again, it’s up to the salesperson to figure out which specs matter and which don’t, and to negotiate and quote the appropriate price.

I’ve used versions to ensure that customers like Intel, Micron, Texas Instruments, and TSMC get what they’re willing to pay for, so I know it can be done. I once used versions to negotiate a $50M service contract with Intel that included a 20% price increase over the previous year.

It’s important to remember that no sales strategy or tactic works in all circumstances all the time. What I’m suggesting is that you try versioning a few times and see what happens. If you do it right and stick with it, your profit will improve. And isn’t that why we’re all in business in the first place?

A Formula for Value-Based Pricing

I define value as the amount of money a customer earns or saves by buying your product vs. buying your competitor’s product, or continuing with the status quo.

To price on the basis of value, first calculate the total amount of money a customer will earn or save over one or two years—think logically but broadly; you must be able to explain this amount, but don’t unduly limit yourself.

Value comes in too many forms to list here, but improvements in yield, throughput, system availability, durability and longevity, and risk reduction are good places to start. Whenever possible, assign a dollar figure to these improvements.

Once you have your overall value figure, price your product at 15% to 30% of that amount.

As you can see, if you do this correctly, you will be able to position your product as a must-have bargain. Your salespeople can talk about price in the context of the return customers will receive, bypassing tedious questions about why your costs are so high.

One of my clients designed and built a system upgrade that would save a customer about $1M every two years. The cost to my client of providing this upgrade was about $40,000. Typically, the client would have multiplied the $40,000 by two to arrive at a price of $80,000.

I recommended that the client price the upgrade at $200,000—20% of the value customers would receive within two years.

The client’s account manager claimed that charging $200,000 was “gouging” the customer, to which I responded, “In what world is a 5X return not a good deal?”

“But our cost is only $40,000! How will I explain the price given the cost?”

“Don’t talk about cost,” I said. “It’s none of the customer’s business. Talk only about the $1M return in exchange for the $200,000 investment.”

In the end, my client reduced the price to $120,000—50% more than the $80,000 they wanted to charge, but far less than they could have asked for and reasonably expected to get. And their customers were delighted to pay it.

As I discussed in my last blog post, you are often your own worst enemy when it comes to profitable pricing. If you keep your focus on value, you will be able to make a lot of money and still keep your customers very happy—because they are paying you far less than what they’re getting in return.

Additionally, value-based pricing enables you to invest more resources into your business, leading to even better solutions for your customers down the line. No one wins when you undercharge for your products and services.

Once you get comfortable with this idea of value-based pricing, you’ll understand that it’s not “gouging” by any stretch—just a smart business practice that benefits both you and your customers.

Who’s in charge of your pricing? You are!

Contrary to popular belief, the market does not set the price when it comes to highly differentiated, high-technology capital equipment. And a handful of professional buyers does not constitute a “market” in any event—especially when those buyers are trained to mislead and even lie to you.

Despite what these buyers tell you, your products are almost certainly different from your competitors’ products. And those differences make your products more valuable to a certain subset of customers.

If basic consumer products like soap, toothpaste, and cereal can be differentiated, high-tech products can be, too. You might argue that these consumers are not as sophisticated as professional buyers, which is true, but neither are these consumer products. The principle works the same way.

Higher prices are the fastest route to higher profits. A 1% increase in average prices can equal a 10% increase in net profit for a company that typically earns 10% net profit. In addition, higher prices can be implemented right away, with your very next quote.

The key to capturing higher prices is being able to explain and justify them based on what the customer gets in return. In other words, you need to be able to say something to the customer like, “For every dollar you spend with me, you’ll earn [or save] X additional dollars.” If you do this effectively, the decision to do business with you becomes easier and less risky.

Over the coming weeks, I’ll address the following pricing topics:

  1. How to talk to customers, senior executives, and supply-chain people about prices
  2. What to say when customers raise objections or challenge your prices
  3. When and how often to talk about price during the sales cycle
  4. How to price on the basis of value instead of cost
  5. How to create versions that allow customers to choose tradeoffs between price and value, long before negotiations take place
  6. How to price services
  7. How to determine what customers will pay before you invest time and money in product development and demos
  8. How to develop an effective pricing strategy
  9. How to successfully raise prices

We have a lot of important ground to cover, so stick with me—I think you’ll find it’s well worth it.

In the meantime, if you take nothing else away from today’s post, remember this one key point: You are not a passive victim when it comes to pricing. The power to set highly profitable prices is in your hands.

The Profit Platform: Pricing, Pitching and People

This blog is a pitch for my services. If you’ve found my previous blogs helpful, I’d appreciate it if you would read the information below and consider ways in which we might be able to work together.

I’m a marketing and sales consultant who helps high-tech companies increase revenue and profit.

I’ve helped many companies boost their bottom line—including:

  • Comet, where we increased gross margins from under 30% to over 40% in three years
  • Magnetic Solutions, where we tripled the value of the company in three years
  • Plasmatreat, where we tripled revenue in five years

Prior to consulting, I was a marketing and sales VP with Applied Materials and Lam Research.

The Profit Platform

Over my 30 years in industry, I’ve developed a model I call the Profit Platform—to be as profitable as possible, there are three key elements that must be in place and supporting each other:

Pricing: Average companies tally their costs to arrive at a price. Highly profitable companies, on the other hand, quantify the value their customers receive and price their products and services accordingly—leading to much higher prices that customers happily pay.

Pitching: many pitches and presentations are too long and difficult for customers to understand and act on. I help my clients design brief, to-the-point pitches and presentations that get attention and drive action.

People: The best pricing and sales strategy in the world won’t do a thing for you if you don’t have the right people to implement it. I help my clients:

  • Hire talented, best-fit employees
  • Develop compensation plans that deliver results and help retain top performers
  • Design the right sales organizations for their company and products
  • Write better job descriptions, goals and objectives
  • Design the right performance measurement systems

A Unique Focus

My clients find this expertise very valuable. Here’s what one of them has to say

“We have been working with Don for over three years now. In that time, his training and coaching have helped us capture higher prices, higher margins, and higher net profit. Specifically, Don has:

  • Raised staff awareness of what profit is, and how to increase it
  • Showed us new ways to market our products based on improved customer results
  • Created effective marketing collateral and presentations
  • Trained our salespeople in both Asia and the U.S. on how to sell effectively
  • Improved our contract pricing and negotiations

In short, Don has fundamentally changed the conversations we have with customers…we are now more focused on the ways that our customers earn and save money by buying from Comet, and that has made a huge difference to our bottom line.”

– Paul Smith, Sr. Vice President, Global Product Marketing, Comet Technologies

My Services

  • Pricing-$2,500 to price a product or service
  • Pitching-$5,000 to develop a pitch and presentation
  • People-$5,000 to develop and implement a plan to recruit, interview and compensate salespeople, design a sales organization, write job descriptions, and develop goals and objectives
  • Coaching and Training-$2,500 for eight hours of coaching and training
  • The Profit Platform Course-$800 per person

Want to Learn More?

Please give me a call at 650-862-0688 or send me an email at don@redchasm.com to schedule a no-obligation consultation and see if we might be a good fit to work together.

Sincerely,
Don Maher
President, Red Chasm

“How Much?” Think Carefully Before Answering This Question

How much? What’s your price? How much does it cost? What will this cost? What’s the best price you can give me?

We hear these questions from buyers every day.

Rather than tossing out an off-the-cuff answer, it’s important to take a little time to think about it. You want the stated price to be appropriate not only for the quantity ordered, but for the customer and the situation as well.

The first issue to consider is whether the customer is profitable for you to serve. In other words, how much net profit (not gross margin) do you earn per year working with this customer? And how does this profitability level compare with other similar customers?

You have unprofitable customers. I know this because every single business I’ve ever worked with does.

Ideally, every salesperson should know the profitability of his or her key customers – and take that profitability into account when pricing.

The best way to improve your profitability is to stop offering your products and services at prices that are too low. Now, you might be thinking you’ll lose business by raising your prices – and maybe that’s true. But no-profit and low-profit business is precisely the sort of business you want to be losing!

To Price Correctly, You Must Also Price the Customer

As I’ve mentioned before, effective pricing involves much more than simply adding up your costs and multiplying by some desired target margin.

Not only does this method fail to account for the value different customers can place on the same products, it also fails to address the level of profitability different customers deliver to your business.

Just as not all products and services are created equal, not all customers are created equal. And, as odd as it may sound, you need to take your customers into account when you set your prices—not just their ability to pay, but the costs involved in doing business with them.

Imagine that your company sells to two customers: A and B.

Customer A buys regularly and in high volumes. Her business is profitable for your company. A also has a partnership mentality and works with you to solve problems when they arise. A always pays on time and is very pleasant to deal with. The time and hassle expended on managing your relationship with A, in other words, is minimal.

Customer B, on the other hand, buys sporadically and in smaller quantities than A. The low prices he gets, along with his demands for high performance and free support, mean that your company earns little or no net profit from him.

B’s mentality is transactional—he is always threatening to jump ship for anyone who offers him a lower price. To make matters even worse, he pays late and has unrealistic performance expectations. You and your team spend a lot of time trying to keep B even moderately happy—to no avail.

This is an extreme example, of course, but you see what I’m getting at. Should these two customers be paying the same price for the same product or service?

Absolutely not!

Since Customer B is a far more expensive customer, B should be paying higher prices.

Ironically, the customers who pay less tend to be a lot more “Type B” than the customers who happily pay a premium to buy from you. The good news is that the better you get at pricing, the more you can afford to ditch Customer B and his ilk altogether.

But that’s a blog post for another day.

Why Group Emails Can Be Your Secret Negotiations Weapon

It’s to your advantage to deal with actual product users rather than professional purchasers, whenever possible. This can be tricky, as purchasing employees try to ensure that all or most communications go through purchasing. But there are ways around this.

I always recommend that my clients use email to document every conversation with purchasing, and then send that email to everyone involved in the negotiation at both the seller and buyer companies.

As a best practice, send a well-written, fact-filled email once a week (or more often, if warranted) to all the key people involved in the negotiation. This can include:

  • customer executives
  • users of your products
  • your own management team

These emails should document any agreements and commitments made by both sides during the previous week and may contain everything from direct quotes from purchasing people to slips in the product delivery schedule (due to negotiations that never seem to end).

You might also include any threats made by purchasing representatives.

Shedding some daylight on the threats, pressure, name-calling, outrageous demands, etc. by purchasing tends to reduce this bad behavior.

If purchasing balks at the idea of these emails (and they will), I tell my clients to respond matter-of-factly that management insists on keeping everyone informed and up to date, with all relevant details fully documented. Doing this will also motivate all parties to behave with civility and honesty, and to keep the rhetoric to a minimum.

Even if you are fortunate enough to be dealing with professional, courteous, well-behaved purchasing people (lucky you!), it’s still very helpful to have this kind of real-time reporting and documentation going on. Written records are your friend.

How To Think About Value

If you’re committed to pricing your products and services at an optimal level, you must be genuinely convinced of the additional value those products and services provide to a customer.

If you are, and if you do a good job of conveying this message, pricing becomes less of an issue to the customer because of what he or she will gain from the purchase. If not, this lack of conviction will be exposed during difficult negotiations. If you don’t “buy” what you’re selling, in other words, your customer won’t, either.

The concept of “value” can be defined in a number of ways. Here are a few to keep in mind:

Financial Advantages (reduced cost, improved performance, ability of the customer to command a higher price)

Experience/Expertise (we have solved similar problems for other people)

Risk Reduction/Assurance (guarantees, case studies)

New Ideas/Ways of Doing Things (the value of being first in a category – e.g., PayPal)

Types of Value

  • Durability
  • Ease of installation
  • Form and fit
  • Process specs
  • Particle performance
  • Throughput
  • Yield
  • Cost to own and operate
  • Field support
  • Delivery speed and consistency
  • Inventory ownership and management
  • Guaranteed pricing over time
  • Payment terms

It’s very important to identify, design, and quantify real, sustainable competitive advantages and differentiators so customers know exactly why they should buy each of your products and services and why they should pay the price you’re asking. This is the cornerstone of smart pricing.

What are your products really worth, to which customers, under what circumstances, and relative to which competitors and substitute products?

Remember: There is no one “perfect” price for anything. The amount you can charge greatly depends not only on the value you provide, but on how effectively you convey this value to your customer.

Why You Need a Holistic Pricing Strategy

The thought of sitting down and plotting out a comprehensive, holistic pricing strategy is daunting to many of my clients. So much so, in fact, that oftentimes they try to “fix” their pricing in bits and pieces over a period of time, figuring that doing something is better than doing nothing.

While this rationale may work for some things, pricing is unfortunately not one of them.

Most companies don’t have any kind of formal pricing strategy. Sure, they set list prices, but they almost never sell at those prices. Instead, they end up customizing prices for nearly every customer, product, and purchase. This leads to some costly and serious problems.

First, salespeople learn that the list prices their employer gives them are only suggestions—starting points from which they can secure lower pricing if they work at it. Since this is much easier than trying to convince the customer to pay more, they default to negotiating for a lower price from their own  company. In essence, they start functioning as an agent for the customer. Clearly, this is not what you want.

Second, tremendous amounts of time and money are wasted when pricing is done in an ad hoc, opportunistic fashion. More and more people (who all believe they’re pricing experts) start to get involved in more and more quotations and proposals. They want to determine or influence the price, or keep track of every change in the pricing process.

If you were to sit down and calculate the amount of money (and time) your company is spending on this type of ad hoc pricing process—not to mention the opportunity costs of failing to get a single, effective system in place—I guarantee that you would be shocked, and strongly motivated to make an immediate change.

Now, don’t get me wrong—establishing a single company-wide pricing strategy requires time, resources, and a lot of hard thinking. It’s the polar opposite of a quick fix. But, as with so many things in life, the payoff of doing it once and doing it right pays dividends many times over. Once I start to show clients just how much more profitable their companies will become with a holistic pricing strategy in place, they become downright eager to get started!

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