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Category : Profitability

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 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!

A Common – and Costly – Negotiating Mistake You’re Probably Making

If you’re a sales professional, you’re probably very skilled at many aspects of price negotiations. But there’s one big mistake I see even experienced sales professionals making on a regular basis, and it’s this: Negotiating one item at a time.

The problem with this is that, when you lose sight of the big picture, you may be bargaining away more than you realize.

For example, at the beginning of a negotiation, an agreement to provide 80/20 payment terms instead of your standard 90/10 terms may seem like a small concession to make.

However, that concession won’t seem insignificant at the end of a negotiation when it’s combined with other concessions such as lower prices, giveaways, additional field support, and tighter specifications. The seemingly little things can add up quickly, until before you know it, you’ve significantly cut into your bottom line.

When the customer says, “I need better payment terms,” your response should be, “That’s certainly possible if you’re willing to agree to the price we’ve quoted,” or, “We’ll need to know and consider all of the concessions you’re looking for before we commit to any specifics.”

You can give as many estimates as you want, but don’t make firm commitments on pricing, delivery, specifications, terms, field support, spare parts, or software until you know what’s really most important to the customer. You may be able to graciously concede something that feels tremendously significant to the other side while not actually giving up all that much once you have an accurate read on the situation as a whole.

Never negotiate one item at a time; always think in terms of final context and package.

Don’t Waste Your Time Trying To Figure Out Your Competitors’ Prices…Here’s Why

Almost across the board, companies spend a lot of time and energy trying to determine what their competitors are charging. Everyone believes that if they can obtain this information, they can then charge just a little bit less for their products—and win a lot of business.

This can be true in very specific situations. For companies that sell standard, relatively undifferentiated products whose prices rarely vary beyond a narrow range, it can sometimes be helpful to know what competitors are charging.

For everyone else, however, pursuing this information is a distraction at best.  In fact, worrying too much about what the competition is charging is not just a waste of time, but ultimately a practice that could potentially be very harmful to your business. Here’s why:

  1. You will start a price war—a race to the bottom—if you regularly undercut your competitors. You can only “win” by reducing or even eliminating your profit margin. (And, of course, if you can determine your competitors’ prices, they can most likely determine yours.)
  2. Pricing is dynamic. Knowing your competitors’ prices today tells you nothing about what they charged yesterday, or what they will be charging tomorrow. Your detective work is never over.
  3. Pricing is situational. Knowing what your competitor charged one customer tells you nothing about what it charged its other customers.
  4. Your sources for competitor pricing info are unreliable at best—who can you trust to tell you the entire, accurate truth? Not your customers’ professional buyers, that’s for sure! It may not even be legal for them to share this info with you—and, if they do, you can be sure they’re shopping your info around, too.
  5. Your competitors’ prices may be too low for the value they’re providing. You don’t want to base any part of your own pricing process on a misleading benchmark that leads you to undervalue your own products and services.
  6. Competitor price sleuthing requires a lot of time, effort, and money—all of which could almost certainly be put to more productive use elsewhere in your business. The opportunity cost, in other words, is extremely high.

Rather than worrying too much about the competition, focus on the unique value you provide to your customers, and price accordingly.

A Common Question You Should Always Refuse To Answer

My clients often ask me what they should do when buyers demand to see their costs. My recommendation is that you should not reveal this information under any circumstances.

For starters, once buyers are armed with a detailed breakdown of your costs, they will naturally question each line item.

You will find yourself being forced to justify what you’re spending on every part of your process, and possibly even whether a given line item is necessary at all. This is a time-consuming endeavor that puts you on the defensive and wears you down.

An even larger problem, however, is that showing buyers your costs shifts the pricing emphasis away from where it should be, which is on the value you provide rather than your costs to provide it.

Oftentimes, a product or service that provides a great deal of value to the end user doesn’t cost all that much to produce or provide. A pricing discussion that turns on your costs will lead to your valuable product or service being tremendously underpriced relative to the benefit it provides.

Costs do have a role in pricing, but that role should be strictly limited to establishing the price floor below which it doesn’t make sense to build or sell the product. The right way to price is to identify, quantify, and clearly articulate the value of a product to your customers, and then determine how much of that value to capture in your prices.

If a buyer starts to question your costs, the best tactic is to turn the conversation around and try to find out why he or she is seeking this information, while at the same time reiterating the value you provide. If the buyer is simply unable or unwilling to pay the asking price, you can reduce it by offering fewer services and/or offering a different version of your product (a less premium version with fewer bells and whistles). Getting into a discussion of your costs, however, is almost never a road you want to start down.

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